ARTICLES MODERN

Safe Haven when the attack comes, you’re really in trouble. But that’s what happened this year for many investors, some bond portfolios have had huge hits.
It’s bad enough that the stock market has plummeted. Even with a late-day rally Friday, Standard & Poor’s 500-stock index is lower than 45 percent for years after. Stocks have fallen so much in a full year of 1931.
But bonds? They would be of an Eddies Las portfolio well diversified - the safe, necessary and boring part of an investor’s diet, such as spinach. The excitement - and risk - in a portfolio should come from stocks. If the bonds fluctuate at all, they are expected to increase in value when stocks decline, a portfolio of buffering back in a rocky market. That, at least, is the common expectation, said L. Robert Rodriguez, director of First Pacific Advisors and co-manager of FPA New Income mutual fund.
But the global credit crisis has shattered the expectations of many investors in fixed-income and on capital markets. With the forced liquidation of bond holdings still the major institutions, as a result of the failure of Lehman Brothers in September, even the slightest whiff of risk in putting a commitment from investors, leading to large losses. And bonds are certainly not a SideShow: Much of the turmoil in the financial sector and overall economy emanated from the credit markets.

Until now, only the most secure unimpeachably fixed-income securities - mostly those issued by the Treasury or otherwise, supported by the United States government, directly or indirectly - generally held their value. “Investors are confused, and they have a lot of misconceptions,” said Mr. Rodriguez. “We need to get to the basic question, and that is, bonds that you actually own?”

Long-term corporate bonds, for example, declined in value by more than 18 percent on average through October, according to Ibbotson Associates, a subsidiary Morningstar. This is worse than any full-year decline on its records going back to 1926.

A rout in corporate bonds, particularly high-yield or junk bonds, was worse, by some measures, even than the distressed market Great Depression, said William H. Gross, co-chief investment officer of the Pacific Investment Management Company. Junk-bond yields - which move in the opposite direction of prices - soared recently 20 percent above.

“These are the unheard, unseen yields, which have never been in anybody’s life,” said Mr. Gross, who manages Pimco Total Return, the country largest bond fund. “Even during the Depression, corporate bonds did not trade in these particular yield spreads, or premiums over Treasuries of comparable yields, Mr. Gross added.

On the positive side, long-term government funds tracked by Morningstar was up 9.2 percent for the year through Thursday.

But in many parts of the market to back bond mutual funds are sobering, with performances that would be abysmal even for stock funds in a typical years. High-yield bond funds were at 29.6 percent for the year through Thursday, bond market emerging were the funds of 26.5 percent, and bank loan funds were at 24.7 percent. Even intermediate-term bond funds, a middle-of-the-road category often used as a basis for holding portfolio balancing, have been 9 percent down.

This is not a typical years, however. Not by a long shot.

“Never before in 25 years, we have seen conditions like this,” said Mary J. Miller, director of T. Rowe Price fixed-income division. “It’s not just credit risk,” she said. “Some parts of the market are liquidity-impaired - there just are not enough buyers out there.”

Municipal bonds were “significantly punished”, she said, because of a lack of buyers and “acute aversion to risk” that permeated the market. Most municipal bonds are, in fact, creditworthy, she said, but their prices have gone down anyway. Loss of independent firms that functioned as the market factors - such as Bear Stearns, Lehman Brothers, Merrill Lynch and Wachovia - disturbance of the market, she said, and so continued unwinding of leveraged bets, packaged as often complex tools Financial derivatives, adopted by hedge funds.

Mr. Gross of Pimco in sales by the wave of hedge funds to Akin as a “margin call”, the bond holders are forced to sell securities at lower and lower prices.

However, some funds from bonds sold as holding basic buy-and-hold investors have their own took place this year. In the current market, that means not losing much money, and in some cases, may earn only a little. These funds include Pimco Total Return, which was 0.3 percent down through Thursday, from the Vanguard Total Bond Index fund, up 0.9 percent, the T. Rowe Price New Income fund , At 2.3 percent, and FPA New Income up 3.7 percent. All these funds are highly rated by both Morningstar and Lipper.

This was possible modest performance, because these funds do not hold much, if at all, in risky areas of the market, said Jeff Tjornehoj, senior research analyst for Lipper. “The funds that did a good take on risk markets have been punished now,” he said.

There are many ways to minimize risk. The Vanguard Total Bond Index fund is managed passively, mirrors and what was until recently known as the Lehman Aggregate Bond index - and is now called Barclay aggregate Bond index, as a result of Barclay’s absorption of Lehman’s bond analysts and indexes. Treasuries in the index gained in value of corporate bonds while he fell, and the results were “about what might be expected from a holding base,” said Fran Kinniry, which leads group of investment strategy at Vanguard.

FPA New Income has taken a different approach, holding large amounts of cash and Treasuries, and keeping the average duration - in essence, the time before a security matures - approximately one year. Reduce the duration of cuts down on the risk of amending yields and inflation.

Pimco has taken a different route, buying Treasuries and investment in fixed-income securities of Fannie Mae and Freddie Mac, the mortgage giants that have been bailed by the federal government. “We did ourselves in essence, partners” in government, Mr. Gross said.

Mr. Gross is taking a similar approach, he said, with investments in shares of the bank’s preferred holding Treasury, which is injected capital. With a shortage of liquidity, and an epidemic of risk aversion, he said, makes sense “to buy something where you can partner with Uncle Sam instead of being left out in the cold.”

With prices falling and the consumer price index fell in October by the largest amount on record, there are signs of disinflation, maybe even the possibility of a cycle of declining prices, known as deflation. Bond strategists caution, however, that the current inflation outlook was murky test of the Federal Reserve and central banks and governments around the world to pump money into the financial system in an effort to strengthen the global economy .

For Mr. Rodriguez, this is a major concern and also a reason to minimize all its bets. “It might be deflation that face first, and then inflation down the road,” he said. “This is a very difficult time.”

Mr. Gross said that for months to come, he expects the bond market to be fighting to assess the risks of inflation and deflation. “It is a legitimate debate,” he said, “and we do not have a clear right to see which one wins.”