Some Mutual Funds Short Bond Prices

Instead of waiting for long-term bond prices to go back up, some mutual funds are offering investors the option of going short, The Wall Street Journal reports.

Rising rates and falling prices on existing bonds are how these funds profit. That scenario is unfavorable for most bond funds, but not for funds using a short strategy, which may make sense at the present time, as some experts now expect long-term rates to go back up. In fact, this year, three new short bonds have hit the market, and they have been doing better in recent months.

Morgan Stanley's chief U.S. credit strategist, Greg Peters, said that long-term rates are "incredibly resilient right now, but it seems like they're poised to move higher."

But these funds aren't for everybody. Because shorting involves betting on how the interest rates will change in the near future, long-term investors with an eye toward retirement aren't likely to gravitate to bond short funds. Scott Berry, a bond-fund analyst at Morningstar Inc., said  "Bond-fund investors tend to be a pretty conservative group. They're not going to get into a lot of market timing, betting on the direction of interest rates."

Rydex Investments' Juno Fund, the biggest and oldest of bond funds that go short, with more than $2 billion under management, is designed to provide a return equal to any fall in the price of the 30-year Treasury bond. Rydex's strategy is to either sell futures contracts, or borrow 30-year bonds and to sell them, hoping to repay  the loans with bonds purchased at a lower price.

Three other funds using similar strategies to short Treasuries. They include the Rising Rates Opportunity fund, managed by ProFunds Advisors LLC, which shorts the 30-year bond. The Rising Rates Opportunity 10 fund, launched by ProFunds in January, and the ContraBond Fund, launched last year by Rafferty Asset Management LLC, short the 10-year Treasury note. Rising Rates Opportunity and ContraBond both make their bets with borrowed money, which increases gains when rates go up and increases losses when rates fall.

Two new funds permit investors to short the market for high-yield, or junk bonds. They are the Access Flex Bear High Yield Fund, launched in April by ProFunds, and th ePotomac High Yield Bear Fund, launched in September by Rafferty.

Though the Federal Reserve raised short-term rates to 3.75% from 1%, long-term are rates still not as high as they were 16 months ago. Due to this, the year-to-date returns on funds that short bonds are looking bad.

"I've certainly been bearish for longer than I should have been," says Dan O'Neill, a managing director of Rafferty, noting that the ContraBond fund has delivered a return of 2.08% so far this year.

Rising concerns about inflation are good for Treasury-bond bears, because investors want more return on longer-term bonds to make-up for the added inflation risk.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.