Are you looking for a top-quality bond fund? You are not alone. Funds that own only U.S. government securities have outsold all other bond funds, although long-term municipal bond funds have nearly caught up with them.
But are government bond funds right for you? Is this a good time to begin investing? And how should you choose a fund?
First, consider whether you can accept the risk that the price of fund shares is likely to fall as interest rates rise. That risk tends to increase with the length of maturities of a portfolio's bonds.
The fact that the Treasury may stand behind some or all of its bonds won't keep the share price from falling as interest rates rise. It means only that the Treasury guarantees to pay interest and repay principal on time -- even if it must borrow to do so.
But all government bond funds aren't concentrated in Treasury notes and bonds. And they involve other risks.
The best time to buy a bond fund's shares is when interest rates are likely to fall, causing bond prices to rise. With interest rates lower than in years, rates may be unlikely to fall. They certainly have less room to fall. Still, nobody knows whether rates will slip, rise or remain stable.
Testifying recently before Congress, Alan Greenspan, chairman of the Federal Reserve Board, said the Fed was prepared to tighten when it perceives inflationary pressures, but he did not predict the direction of long-term rates.
Others have forecast all over the lot. Economists, surveyed semiannually by the Wall Street Journal, predicted a year ago that rates for 30-year Treasury bonds would be anywhere from 5.5 percent to 8.5 percent on June 30. The actual rate: 6.68 percent.
In the most recent survey last month, their forecasts for rates next June 30 ranged nearly as widely: 5.5 percent to 8 percent.
So, what do you do? Consider how long you plan to be invested and decide what maturity range would be compatible with your goal and risk tolerance.
In choosing a government bond fund, remember there are several categories. Lipper Analytical Services uses six: short-term, intermediate-term, general U.S. Treasury, U.S. government funds, GNMA and U.S. mortgage funds.
General U.S. government funds is by far the largest category, with more than 130 funds.
Unlike Treasury funds, which invest primarily in Treasury issues, government funds invest also in issues of federal agencies. The issues may -- or may not -- have the full faith and credit of the Treasury behind them. Average maturities may exceed 10 years.
