Long-Term Government Bonds Are on a Tear … Again!

Deflationary concerns and a flight to quality have combined to produce terrific returns for long-term government bond funds. The 30-year U.S. Treasury bond's yield has fallen from 4.64% at the beginning of the year to 3.99% as of July 8, 2010. The long bond last traded under 4% in May 2009, when deflation was at the forefront of investor concerns. This quick, sharp drop in yield has upped the returns of bond prices and long-term government bond funds.

The category's 14.94% year-to-date gain through July 7 is the best of all fund groups at mid-year. That's not close to the long-term government funds' 52.3% average 2008 gain, but it is far better than the 44.1% the typical fund in the category lost last year.

The best-performing fund is PIMCO Extended Duration (PEDIX). It's up 22.75% in the year to date and 16.9% annualized over the last three years. It has done well in part because the fund takes on a significant amount of interest-rate risk. Its average effective duration (a measure of interest-rate sensitivity) was 26.5 years as of March 31. This means another 1% drop in interest rates would lead to a roughly 26.5% gain for the fund.

But long-term, buy-and-hold investors should beware. The only way for these funds to keep up this year's pace is for long-term bond yields to fall even further. While yields may continue to fall over the short term, with a current yield under 4%, it is unlikely these funds will make the 6% annualized nominal return the average fund in the category has posted over the last 10 and 15 years.

  Total Ret YTD Annual Ret 2009 Annual Ret 2008 Total Ret Annlzd 5 Yr PIMCO Ext Dur Instl (PEDIX) 22.75 -28.19 49.19 n/a Vanguard Ext Dur Treas Idx Instl (VEDTX) 20.32 -36.65 55.52 n/a American Century Targ Mat 2025 Inv (BTTRX) 18.72 -20.96 26.75 4.89 Rydex Govt Lg Bd 1.2x Strat Inv (RYGBX) 17.51 -31.26 49.98 4.73 ProFunds US Govt Plus Inv (GVPIX) 16.94 -33.96 49.55 3.49

Returns as of July 7, 2010

New Eaton Vance Fund
Eaton Vance launched a new fund last week: Eaton Vance Option Absolute Return Strategy. Four managers will lead the fund: Thomas Luster, Maria Cappellano, Kenneth Everding, and Jonathan Orseck. Per the fund's prospectus, the fund seeks to supplement income from short-term, high-quality bonds with a mix of stock options. The option strategy will consist of calls and puts on the S&P 500 Index in an effort to provide returns uncorrelated to the returns of the index. As for the fixed-income portion of the fund, the managers aim to maintain an average maturity of one year or less. The Class A shares of the fund will charge a 1.75% total fee after an expense reimbursement.

Manager Shuffle at Columbia Strategic Income
On the heels of Ameriprise's acquisition of Columbia, Laura Ostrander has left Columbia and will no longer manage  Columbia Strategic Income (COSIX) and Columbia International Bond . Ostrander had managed Strategic Income since September 2000 and International Bond since its inception in December 2008.

Replacing her on Strategic Income are Colin Lundgren and Gene Tannuzzo (the comanagers of RiverSource Strategic Income Allocation ) as well as Brian Lavin, a high-yield-credit analyst and portfolio manager at RiverSource. At International Bond, Nicholas Pifer from RiverSource will take over as sole manager. Pifer also manages RiverSource Emerging Markets Bond (REBAX), RiverSource Global Bond , and RiverSource Absolute Return Currency and Income .

Invesco Announces Manager Changes
Invesco recently announced numerous portfolio-management changes in relation to its recent acquisition of Morgan Stanley's retail asset-management business. Most of the manager changes involve U.S. equity value funds.

One big new hire related to the transaction is Erik Voss, who was previously the portfolio manager of Seligman Growth . Voss was named to run multiple Invesco U.S. growth funds, including the $3.4 billion  Invesco Van Kampen Capital Growth . That fund enjoyed a strong performance under Dennis Lynch, who is remaining at Morgan Stanley.

Now that the merger is complete, four of Invesco's five largest retail mutual funds are former Van Kampen funds. Invesco now has approximately $103 billion in mutual fund assets as of the end of May. This is up from about $88 billion in May 2009.

Please click here for all of the portfolio-manager changes.

Etc.
MFS offered three new regional funds last week: MFS Asia Pacific ex-Japan, MFS European Equity, and MFS Latin America Equity. Each of the funds will invest at least 80% of its assets in equities tied to their specific region.

Oppenheimer launched a pair of funds last week: Oppenheimer Currency Opportunities and Oppenheimer Emerging Markets Debt. Alessio de Longis will manage Currency Opportunities, which invests in short-term debt tied to foreign currency and currency derivatives. Sara Zervos will manage Emerging Markets Debt.

Wells Fargo announced mergers of several funds: Wells Fargo Advantage Aggressive Allocation  merged into Wells Fargo Advantage Growth Balanced , and Wells Fargo Advantage Growth Equity  merged into Wells Fargo Advantage Diversified Equity .

Thomas Vandeventer replaced Drew Rankin, Doug Adams, and Allen Huang as the sole portfolio manager of Tocqueville Small Cap .

Lloyd George and Irina Chistyakova replaced Kathryn Langridge as comanagers of Eaton Vance Emerging Markets .

Joseph Elegante, Jason Ley, and David Randell will replace Michael Reilly and James Reilly on the portfolio-management team of  AllianceBernstein Large Cap Growth (APGAX).

Raymond Humphrey joined the portfolio-management team of Hartford US Government Securities HLS .

Charles Wang is off the portfolio-management team of  Acadian Emerging Markets (AEMGX).

Phillip Torres joined the portfolio-management team of  UBS Dynamic Alpha .

Mutual fund analyst Ryan Leggio contributed to this report.