Bonds have gotten a lot of attention over the past year and it’s easy to see why when you look at this chart.

What you’re looking at is a relatively smooth ride up until the world collapsed in October of 2008. The investorspeak for that smooth ride is “low volatility”, and it’s one of the main traits of bonds in general, when compared to stocks. But 2008 was anything but usual, and once panic hit the markets bonds collapsed just like stocks. It was a sensible panic in many ways. After all, no one was really sure what the true debt picture was and bonds are nothing more than debt that the debtor has agreed to pay back in a timely, and consistent fashion with interest. But what if the debtor suddenly wasn’t as financially stable as you were led to believe? What if the bond ratings were smoke and mirrors, and your bond wasn’t worth the proverbial paper is was once printed on?

The good and the bad.

So, you see around October, 2008 the steep drop in the prices of these bond funds.

So far, so good. That’s the unusually bad angle. The unusually good side of the picture comes in the months after the market bottomed, around March, 2009.

• BJBHX saw a return of approximately 45% from its March 2009 lows.
• FRHIX saw a return of approximately 15% from its March 2009 lows.
• PRHYX saw a return of approximately 40% from its March 2009 lows.
• DODIX saw a return of approximately 13% from its March 2009 lows.

(More on the individual returns below.)

Bond funds don’t usually produce these kinds of returns, unless they’re junk bonds but they’re (usually) much riskier.

Are bonds still a good buy?

In a sense, all that stellar return was simple the market realizing the world was not coming to an end, and returning back to the norm. The chart above bears this out rather nicely.

So, it would seem that the major upside potential for bonds has played itself out and we have returned to something at least resembling normalcy. But that doesn’t mean that you should avoid bonds. You just shouldn’t be expecting the kinds of return seen in bonds over the past 8 months or so.

Meet the bond funds.

These bond funds come from 3 different categories, which in part explains their diverse returns. These categories are Municipal, High-yield (A.K.A. Junk), and Corporate bonds.

Municipal Bond fund.
My pick for municipal bond fund is the Franklin High Yield Tax-Free Income fund (FRHIX). This fund current yields about the same as 9.4% in a taxable fund (assuming a 35% federal income tax bracket). Tax free municipal bond funds don’t usually see a return of 15%, so this fund has definitely been a winner for those looking for tax free income because they’ve also gotten a very nice return on their investment along with the income.

High-yield bond fund.

Often times, bonds in this category are less than affectionately known as “junk”, but the Artio Global High Income (BJBHX) fund is far from junk. It boasts a 5 star Morningstar rating, and should be viewed more as a speculative, or higher risk bond fund than as junk. It currently sports a 7.4% yield, 1.00% expense ration and it delivered an eye popping (for a bond fund) 45% return from its March 2009 lows.

Another very good high yield bond fund is the T. Rowe Price High-Yield fund (PRHYX), which has a 4-star rating and a yield of 8.5%. It also delivered an eye popping return since its March 2009 lows – 40%. It has a 0.80% expense ratio, which isn’t bad considering its category.

Corporate bond fund.

My choice for corporate bond fund is the 5-star Dodge & Cox Income fund (DODIX). This fund has a 5.22% yield, 0.43% expense ratio and produced a relatively small 13% return. But remember – 13% is usually the realm of high-yield/junk bonds, but this fund is a corporate bond fund that targets only those rated A or better by either Standard & Poor’s Ratings Group or Moody’s.

Conclusion.

It would seem that the wild ride in bonds is over, at least for a while. So you shouldn’t expect such remarkable returns from these bond funds in the foreseeable future, but they are at the top of their class and should still provide a stable income in the years to come.

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Bonds are an important part of any good asset allocation, and here are 3 bond funds from the Pimco firm as recommended in a recent Kiplinger magazine article.

PIMCO bond total return (PTTAX).

Manager Bill Gross sticks to investment grade, intermediate-term U.S. bonds for this fund. The expense ratio for this fund is 0.90%, and yields 4.97% and has a YTD return of 10.44%.

By comparison, the Harbor Bond fund (HABDX) carries an expense ratio for this fund is a mere 0.60% of assets and the yield is a respectable 3.91% and has a YTD return of 10.89%.

As you can see from the chart, performance parity of the two funds is very tight.

PIMCO Investment Grade Corporate (PBDDX).

Manager Mark Kiesel has the latitude to venture into other sectors with this fund, but his performance suggests it’s warranted. The fund’s D shares have a YTD return of 12.57%, expense ratio of 0.90% and yield 4.82%.

PIMCO Emerging Local Bond D (PLBDX).

This fund invests in emerging markets debt that is denominated in the local currency. Admittedly, it’s a bit riskier than the other two, but it also provides global diversification. Currently the YTD return on this fund is a whopping 19.81%, and the expense ratio is higher as well, coming in at 1.35%. The yield is a very nice 5.37%.

All funds in this article are rated 5 stars by Morningstar

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Morningstar has released their top 3 Bond Funds for June-July. Here’s the list:

High-yield bonds.

T. Rowe Price Spectrum Income (RPSIX)

This is a fund of funds. The management team invests in up to 9 T. Rowe Price funds in order to get exposure to all of the sectors of the bond market. The fund took a 14.7% hit in 2008, due to the high yield aspect, but it’s up 6.3% for the year ending May 29.

Intermediate-term bonds.

Metropolitan West Total Return Bond (MWTRX)

The management team of Stephen Kane, Laird Landmann, and Tad Rivelle have been at the helm of this fund since 1997, and with excellent results. The team focus on a selective group of bonds including BB and B rated, higher yielding issues and bank loans. However, they also placed a contrarian bet on commercial and residential mortgages in 2008, so this fund is not for the impatient or conservative investor.

FPA New Income (FPNIX)

Here’s a more conservative fund. Manager Bob Rodriguez has maintained a “buyer’s strike” against high-yield bonds and U.S. Treasuries, and has a sterling long-term record. One item of note however: Rodriguez plans to take a one year sabbatical starting January 2010, but he is passing control of the fund to Thomas Atteberry, the fund’s co-manager.

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Looking for an easy, diversified portfolio of stock funds that will grow your money over time, but won’t take over your life with demands on your time? ladies, gentlemen and undeclared’s, I present the simple 7 portfolio..

Each recommendation is either an ETF, or a no-load mutual fund. Some people prefer mutual funds, and others ETFs, but there is little difference here. Most are also index tracking funds, so they are relatively low maintenance – for the set it and forget it, long term buy and hold investor. Most expense ratios are under 1%

The Simple 7 Portfolio.

1. A blue-chip U.S.-stock fund.

• iShares S&P 500 Index (IVV )

• Selected American Shares (SLASX)

• Fidelity Spartan 500 Index (FSMKX)

2. A blue-chip foreign-stock fund.

• Vanguard Total International Stock Index (VGTSX )

• Vanguard FTSE All World Ex-U.S. ETF (VEU)

• Dodge & Cox Intl. Stock (DODFX ) .

3. A small-company fund.

• Vanguard Small-Cap ETF (VB ).

• T. Rowe Price New Horizons (PRNHX)

• Vanguard Small-Cap Index (NAESX)

4. A value fund.

• iShares S&P 500 Value Index (IVE)

• Vanguard Value Index (VIVAX)

• T. Rowe Price Equity Income (PRFDX)

5. A high-quality bond fund.

• Vanguard Total Bond Market ETF (BND)

• Vanguard Total Bond Market Index (VBMFX)

• Harbor Bond (HABDX)

6. An inflation-protected bond fund.

• Vanguard Inflation-Protected Securities Fund (VIPSX)

• T. Rowe Price Infl.-Protected Bond (PRIPX)

• iShares Lehman TIPS Bond (TIP)

7. A money-market fund.

• Fidelity Cash Reserves (FDRXX)

• Vanguard Prime Money Market (VMMXX)

• Schwab Value Advantage Money (SWVXX)

I leave the actual asset allocation to you, since that will depend on your time horizon, risk tolerance and so forth.

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