U.S. bond funds that focus on buying long-term U.S.
government debt were the biggest winners in the world of fixed income in 2014,
fueled by the largest annual rally in U.S. government bonds in three years. The
$1.3 billion Vanguard Extended Duration Treasury Index Fund posted a total
return—including price changes and interest payments—of 45.7% last year, the
best return of all U.S. bond funds followed by the fund-tracking company Morningstar Inc.
The results, each representing the best annual gain for the
funds since 2011, were more than 10 times the average 4.4% return last year on
all 1,838 U.S.-based bond funds tracked by Morningstar. Both funds are in the
category of long-dated government bond funds tracked by Morningstar. The
Vanguard fund passively tracks a bond index of long-term Treasury bonds, while
the Pimco fund is actively managed and focuses on investing in long-term
government debt.
The yield on the 30-year Treasury bond tumbled to 2.753% at
the end of 2014, from nearly 4% at the end of 2013, marking the biggest annual
decline since 2011. The yield has fallen further this year, trading at 2.592%
Thursday. The record closing low is 2.466% set in July 2012. Bond prices rise
when their yields fall.
Long-term bond prices often swing in response to changes in
interest rates. When bond yields rise, such as in 2013, prices of these bonds
take a beating. Both the Vanguard and the Pimco funds invest in long-dated
zero-coupon Treasury bonds, whose prices are the most vulnerable to big swings
in the Treasury bond market. That is because investors don’t get regular
interest payments, so a rise in bond yields will send their prices tumbling
more.
Investors plowed $2.3 billion of new cash into long
government bond funds over the first 11 months of 2014, representing about 25%
of the category’s net assets of $9.1 billion at the end of November, according
to the latest data from Morningstar. That is on pace for the biggest annual net
inflow since at least 1993, when Morningstar started tracking flows for the
category.
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