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The Temptations and Dangers of Higher-Yielding Funds

A shift is under way in the makeup of the taxable-bond universe.

Predictions of a much-anticipated "Great Rotation" of assets from bonds into equities have fallen flat so far in 2014. Despite the Federal Reserve’s unwinding of its bond-buying program--at this point projected to be complete in October--long-term bond yields have fallen, with the 10-year down to 2.5% yesterday, from more than 3% at the end of 2013. Meanwhile, flows to fixed-income mutual funds are solidly in positive territory for the year to date, with taxable funds raking in more than $80 billion through June and munis up $12 billion over the same period.

However, there has been a smaller but still important shift in the makeup of the bond-fund universe. That move was on display in 2013 as more than $110 billion in assets flowed out of the traditional "core" categories of intermediate-term government and intermediate-term bond, while $130 billion flowed into the non-traditional-bond and bank-loan categories. And the trend has continued into 2014, with a slight twist. Intermediate-term bond flows turned positive in the first half of the year, but the heaviest flows have surged into non-traditional-bond funds, while the multisector and high-yield categories also took in meaningful sums.

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