Bond-fund investors feel the sting of rising Treasury yields

The yield on the bellwether 10-year Treasury note has jumped from 1.37% in early July to 1.70 Thursday.

Bond-fund investors are already starting to feel the sting of rising interest rates.

The yield on the bellwether 10-year Treasury note has jumped from 1.37% July 8 to 1.70 Thursday. When interest rates rise, bond prices fall, and at current yields, investors aren’t getting much income to cushion the blow.

Typically, the longer a bond’s maturity, the bigger the price drop when interest rates rise. And that’s been the case in the bond market’s recent selloff. One of the hardest-hit funds is the Vanguard Extended Duration Treasury ETF (EDV), which has fallen 8.02% since the bond market’s July peak. The fund invests primarily in zero-coupon bonds. Similarly, PIMCO’s 25+ Year Zero Coupon U.S. Treasury ETF (ZROZ) has fallen 7.65%.

The median long-term government ETF — half higher, half lower — is down 5.12%. Funds that invest in long-term Treasury Inflation-Protected Securities have also been deflated a bit, falling a median 1.14%.

Funds that invest in shorter-term debt have taken smaller hits. iShares Core U.S. Treasury fund (GOVT), the worst performer in the intermediate-term government ETF category, has fallen 1.52% since July, vs. an average loss of 0.85%, according to Morningstar, the Chicago investment trackers. Short-term government bond funds have fallen 0.18%.

But the picture is hardly one of widespread woe. Corporate bonds, especially high-yield funds, have held up well. The average junk fund has turned in a decidedly untrashy 2.53% gain since the July low in yield, in part because maturities on high-yield debt tend to be relatively short and economic conditions have been relatively good.

The top ETF performer was AdvisorShares Peritus High Yield (HYLD), up 4.45%. But Northeast Investors Trust (NTHEX), a venerable high-yield fund, has posted a 7.66% gain since July. PIMCO Capital Securities and Financials (PFANX) ranked second in the open-end junk world, rising 5.41%.
Emerging markets debt has also performed well as U.S. yields rose. The median emerging markets fund rose 1.57%, and the median fund that invested in local currency debt emerging debt gained 1.38%.

Nontraditional bond funds, most of which aim to shield investors from rising rates, also held up well, gaining a median 2.09% since the July peak in the bond market. Top performer was the WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration ETF (HYND), which gained 5.10%.

Despite the recent losses, bond fund investors have little to complain about, says Sarah Bush, director of fixed income strategies at Morningstar. “It’s generally been a good year for all kinds of bond funds,” Ms. Bush said. “All bond categories are in positive territory year to date, and long-term government bonds are up 12.3%.”