Mutual Fund Buzz: Bond Bubble?

Kirk Shinkle

Is the bond bubble real? The WSJ says yes after surveying bond-fund managers.

It's been a huge year for bond funds, as fixed income funds felt the love along with a rush of inflows from investors who fled stocks and balked at stashing cash in money market funds where super-low interest rates made returns pretty unpalatable.

Unfortunately, the tide may be turning as more scared investors continue to pile into bonds in the face of a still-weak economy and the European debt crisis. The bad news is that bonds can lose money (it's happened three times between 1985 and 2009), and it could happen again. From the WSJ:

"After the fall of technology stocks in 2000 and the financial crisis of 2008, many investors shunned stocks and headed for the perceived safety of fixed income. But that stampede into bonds, coupled with changes in the economy, threatens investors with losses in their longer-term bond funds.

That is because interest rates will likely rise in coming years from a base of almost zero today. Higher rates slam bond values. But investors mostly only know what they have seen in the past 25 years, which for the most part has been a period of steadily declining interest rates and rising bond prices."

Remember: Following the herd into bonds now could be a great way to lose money.

WSJ: Bond-Fund Managers See Signs of a Bubble

Stock funds are still taking a beating, but TheStreet lines up a few that have managed to boost returns thanks in part to dividends kicked off by large-value funds. Here's why:

"For much of last year's rebound, large value stocks lagged. During the past year, large value funds returned 20%, trailing small value funds by 14 percentage points, according to Morningstar. Large value funds sell for a price-to-earnings ratio of 14, a modest figure at a time when small growth funds command a multiple of 18.8."

TheStreet: Mutual Funds' Dividends Prop Up Returns

Here's the highlighted large-value funds:

--Amana Trust Income (AMANX)

--Mutual Shares (TESIX)

--Columbia Dividend Income (LBSAX)

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