Muni bond funds lead the pack after rocky 2008

Municipal bond funds led the fixed-income pack during the first quarter after taking a drubbing in 2008.

Eight out of the 10 best-performing bond funds during the three-month period ended March 30 were municipal bond funds, according Lipper Inc. of New York.

Municipal bond funds on average returned 4% to 6%, Lipper said.

The $5.3 billion Eaton Vance National Municipals Fund (EVHMX), offered by Eaton Vance Corp. of Boston, was the best-performing fund, with a 14.34% gain.

That’s a big improvement from 2008, when the fund lost 31.63%.

“Municipal bonds really took it on the chin for an extended period last fall,” said Jeff Tjornehoj, senior research analyst at Lipper. “There was a lot of trading going on by hedge funds that had put trades of munis out there to the detriment of the muni bonds. The unwinding caused lots of selling pressure.”

News of the poor fiscal health of such states as California didn’t help, Mr. Tjornehoj said.

“There have been a lot of resolutions to those earlier problems,” he said. “And defaults are extremely low with these funds.”

Loan participation funds also performed well during the quarter, with an average of nearly 8%.

Two such funds made the list of last quarter’s 10 best-performing bond funds. They were: the $966 million Eaton Vance Floating Rate Advantage Fund (EVFAX), which returned 12.44%, and the $607 million JHancock2 Floating Rate Income NAV Fund (JFIDX), offered by John Hancock Financial Services Inc. of Boston, which returned 10.99%.

Loan participation funds invest in short-term, high-yield corporate paper.

“Investors are getting their confidence back,” Mr. Tjornehoj said. “High yield was oversold last year, and probably more due to emotions than was warranted.”

Funds that invest in Treasury inflation protected securities also performed well, with an average return of 4.5%, Mr. Tjornehoj said.

Bond funds tend to do better in periods of market turmoil, said Greg Zandlo, president of The Zandlo Financial Group of Minneapolis, which has $50 million in assets under advisement.

“And there is the looming specter of higher taxes,” he said.

“Investors could be making a strategic, defensive move by putting more assets into these funds. But if we do get that whiff of inflation, the funds may be subject to a little more volatility.”