THE long period of redemptions for bond mutual funds may be over. 'In the next few months, we expect investors to get back into bond funds,' said Thomas Steffanci, director of fixed-income and money-market investments for Fidelity Investments. That could be more than a sales pitch. Mr Steffanci pointed out that individual investors, taking advantage of the big rise in yields, were buying Treasury securities at the fastest rate since late 1990. This was the second stage of a typical investment cycle, he said in New York. In the first phase, individuals sold bond funds and bought safer money-market funds. That is what happened this year. In the second phase, a few months later, they bought Treasury securities, which usually happened at the same time interest rates were peaking. Finally, in the third phase, they bought bond funds again. Individuals redeemed a net US$10.8 billion from more than 2,000 taxable bond funds in the past three months, according to California-based AMG Data Services, which tracks mutual funds. 'And that's a conservative number,' said AMG president Robert Adler. The redemptions are occurring in the bond market's worst year since 1969. US government bond prices have fallen as much as 20 per cent this year, as interest rates climbed steadily, eroding bond values. Fidelity, which manages about $31.1 billion in fixed-income assets, said money had left its 32 bond funds for nine straight months. Now the flow of money out of bond funds had slowed, Mr Steffanci said, and 'we expect buying to occur in the next three to six months'. Statistics from the Treasury Department show the second stage of Mr Steffanci's investment cycle clearly is at hand. 'We're seeing a significant increase in buying of Treasury securities,' said Peter Hollenbach, public affairs officer at the Treasury's Bureau of Public Debt. On October 31, individual investors held $73.6 billion worth of Treasury securities bought directly from the government, up from $60.7 billion on March 31. Historically, investors had held about $60 billion worth of Treasuries, Mr Hollenbach said. Fidelity said individuals were buying more Treasury securities through its discount brokerage unit than at any time since it was formed in 1979. American Capital Management & Research, a Houston-based mutual fund company, reported another hopeful sign for bond funds. It said 9.3 per cent of the respondents to a survey this month said they would invest in bonds - up from 7.4 per cent in November. Rising interest rates make fixed-income securities attractive. Today, for instance, investors can buy 30-year Treasury bonds that yield 7.92 per cent. Or they can get almost as much in safer five-year notes, which yield 7.78 per cent. 'Why not buy the five-year Treasury note?' asked Tony Sagami, president of the Donoghue Group, a Seattle-based research firm. 'You can own a piece of paper that's paying almost eight per cent for five years. That's not bad.' While the bond market has suffered its biggest losses since a man first walked on the moon, the US stock market is flat this year. 'This means the bond market has factored in a lot of things that the stock market hasn't,' said Ned Notzon, who helps manage $3 billion in assets at T Rowe Price. With government bonds yielding close to eight per cent and stocks yielding little more than a third of that - the current dividend yield on the stocks in the Standard & Poor's 500 Index is 2.86 per cent - there was no question bonds were the better value, said James Getz, president of Federated Securities Corp, the marketing and sales unit of Federated Investors in Pittsburgh. Phase three of Mr Steffanci's investment cycle may be at hand. Bloomberg
