Rising Interest Rates Take Bite Out Of Most Fixed-Income Funds; Fed's 0.25-point increase meets markets forecasts; corporates are harmed less.(SERIES: FUNDS & PERSONAL FINANCE/MUTAL FUND QUARTERLY)(IBD SPECIAL REPORT)

Byline: MURRAY COLEMAN

On the last day of the second quarter, the Federal Reserve did what bond fund investors had expected: It nudged short-term rates up 0.25% to 1.25%.

In May, investors pulling money from bond funds jumped to a record $16.15 billion. They didn't want any part of harmful effects that rising rates have on bond prices.

As it was, the least rate-sensitive bond funds did the best in the quarter. Ultra short-term funds, which invest in notes coming due within a year, returned -0.23% in the period, preliminary Lipper figures showed.

Strong Economic Numbers

Short-term U.S. government bond funds returned -1.16% while short-term U.S. Treasuries fell -1.21% on average. Strong employment and the CPI number in March drove up yields on three-year notes, which jumped 1.25% between the start of April and mid-May. As anticipation of rate hikes from a historically low 1% level spread, yields surged to 3.41% by mid-June. Those leveled off later in the month and prices stabilized somewhat.

"The market in April and early May was still speculating on how much the Fed would raise rates," said Gibson Smith, who manages two Janus bond funds. "It became clearer as time went by that those would come in on the low end. That resulted in a small rally in bond fund prices."