Long-term U.S. government funds yielded 22.5% in the fourth quarter of 2008, for a three-month performance of 27.1% year to date, according to data from Morningstar Inc., as investors flocked to safety.
This surge in demand resulted in higher bond prices and lower yields. The 10-year note's yield fell to 2.07%, the lowest ever recorded. Merrill Lynch's Treasury Index was up approximately 14% for the year, the highest since 1995.
Most bond funds did much worse in 2008, especially risky corporate bond funds. High-yield corporate junk bond funds fell 18.1% in the fourth quarter, finishing down 25.8% for the year.
Despite their popularity in 2007, emerging market bond funds fell 10.9% in the fourth quarter and were down 17.5% for the year, Morningstar said.
Diversification remains as crucial as ever, and experts still recommend a well-balanced portfolio that includes Treasurys, money market funds, CDs and TIPS funds, which protect against inflation.