Rising Rates Took Toll On Bond Funds In Month And Qtr.(SERIES: MUTUAL FUND QUARTERLY)(IBD SPECIAL REPORT)

Byline: MURRAY COLEMAN

Bond funds that invested in short-term issues and higher quality issues weathered stormy markets the best in March.

Shorter-term bond funds suffered the least, according to preliminary Lipper data. But corporate issues of all maturities were hit harder than Treasuries.

"American automakers are trading in credit quality at below investment-grade level," said Brad Eppard, who manages $1.7 billion in retail and institutional taxable bond assets at BB&T Asset Management. "But since they're not rated that way yet, they're still showing up in the major investment-grade bond indexes."

The average short-term corporate bond fund, ranging in maturities from one to three years, returned -0.14% in March. It lost 0.22% in the opening quarter to 2005. But short-intermediate corporate funds, invested in issues maturing in three to five years, fell 0.38% during the month and 0.66% in Q1. And corporate bond funds with maturities of five to 10 years returned -0.61% during March and 0.60% in the quarter.

Funds holding shorter maturity bonds usually hold up better amid rising interest rates. But that has seldom been the case during the Fed's recent string of rate hikes. It lifted the federal funds rate again on March 22 to 2.75% for its seventh straight increase.

The Fed also warned that inflation signs were becoming more evident. Some traders took that as a sign future rate hikes would be greater than a quarter-point. Up to now that's been the Fed's preferred increment of movement. "The Fed seems ready to take a more aggressive interest rate approach," said ...