Why Did My Bond Fund Lag When Treasuries Rallied?
The answers have both short- and long-term implications.
Although most of the drama has been in stocks, plenty of fund investors have been watching their bond funds closely during the past few weeks. The equity market's panic was enough to unnerve anyone, and with Morningstar estimates of taxable-bond fund purchases topping more than $630 billion since 2008, the "unnerved" probably includes a lot of us.
But while most can breathe a sigh of relief given that the average high-quality bond fund has enjoyed positive returns, those looking closely may wonder why their core bond funds didn't perform even better. The rally in 10-year Treasury note prices garnered some attention in the news as its yield sank to 2.14% by Aug. 10 even after Standard and Poor's downgraded Uncle Sam from AAA. For the brief run from July 27 to that point, its total return was a generous 7.4%.
So why didn't most bond-fund investors make a killing last week? For one thing, the 10-year Treasury note is a much more interest-rate sensitive--and volatile--individual security than the average core bond fund. Over the past few years, the duration of the 10-year has hovered above eight years (even passing nine at times), as compared with the intermediate-term bond-fund average, which has been around 4.5 years. That lower level of rate sensitivity was a good indicator that the impact of the Treasury rally wouldn't be felt as strongly by the average intermediate bond fund.
Eric Jacobson has a position in the following securities mentioned above: PTTRX. Find out about Morningstar’s editorial policies.