KIPLINGER 25 UPDATE


Loomis Sayles Bond Leads the Pack

How our bond fund picks are holding up in the face of rising interest rates.



Interest rates are on the march again. Last December, the yield on the benchmark ten-year Treasury note stood at 4.4%. As of June 14, the ten-year yielded 5.2%. By the standards of the bond world, that's a huge move in a relatively short period. Because bond prices tend to move inversely with interest rates, rising yields are generally bad for bond funds. How fare the five bond members of the Kiplinger 25?

The worst performer over the past year through June 13 was Harbor Bond (symbol HABDX), managed by a team at Pimco led by fixed-income guru Bill Gross. The intermediate-term bond fund gained 3.0%, trailing the Merrill Lynch U.S. Broad Market Index by 1.5 percentage point. Gross made a big call on interest rates -- he expected the Fed to start cutting rates aggressively -- and got it wrong. In his latest commentary (recommended primarily for insomniacs and bond geeks), Gross indicates that Pimco's long-term outlook on the bond market has become more bearish. Citing the possibility of "creeping inflationary tendencies," Pimco now sees the ten-year Treasury note ranging between 4.0% and 6.5% over the next three to five years.

Dodge & Cox Income (DODIX), a similar blend of Treasuries, corporate bonds and mortgage paper, returned a respectable 5.4% over the past year and, like Harbor, currently yields nearly 5%.

The best performer -- we note a pattern here -- is Loomis Sayles Bond (LSBRX), run by Dan Fuss and Kathleen Gaffney. This fund makes the most of a flexible charter that allows it to seek out bond values around the globe. Three of Fuss's current favorites are Canadian, Mexican and South African government paper. Loomis Sayles, which currently yields 5%, returned 10.2% over the past year.

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A tax-free bond fund, steady Fidelity Intermediate Municipal Income (FLTMX) has done its thing, returning 2.8% over the past year. The fund yields 3.4%, which is equivalent to a taxable 4.7% for an investor in the 28% federal tax bracket and 5.2% for an investor in the 35% bracket. Suitable for taxable accounts of investors in high tax brackets, this consistent muni fund is packed with state tobacco settlement bonds.

If you expect interest rates to continue rising, you may want to consider Fidelity Floating Rate High Income (FFRHX). This bank-loan fund is insulated from the corrosive effect of rising rates because the interest rates on the loans it invests in can be adjusted quarterly. The fund's share price, or net asset value per share, has remained remarkably steady during the interest-rate runup. Floating Rate gained an impressive 7.1% over the past year and sports a current yield of 6.3%.




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