Mutual funds with exposure to U.S. stocks are bleeding since the start of 2016 owing to investors' lack of confidence in the domestic market. Consequently, the focus is shifting towards alternative investments that look relatively safer now. Amid the ongoing downturn, with sluggish domestic and overseas growth conditions, government securities have attracted investors' attention by virtue of their safe-haven appeal. Moreover, continued decline in U.S. Treasury yields, which tend to move in the opposite direction of bond prices, points to the growing popularity of government securities.
In this backdrop, fundamentally strong mutual funds with significant exposure to government securities may turn up as excellent investment propositions.
Declining Yields, Rising Inflows
The yield on the U.S. 10-year Treasury note declined 5% to 1.736% on Monday - the lowest level since Feb 2, 2015 - following a sell-off in financial stocks and a decline in energy stocks induced by another plunge in oil prices. This was also the sharpest one-day decline since July 6, 2015.
Since the start of 2016, Treasury securities are luring investors, leading to a 25% decline in yields. Year to date, the Dow, S&P 500 and Nasdaq have lost 8%, 9.3% and 14.4%, respectively.
Mutual funds that are focused on acquiring Treasury securities have witnessed significant inflows so far this year. According to Lipper, while funds invested in domestic stocks registered outflows for five weeks in a row, Treasury funds attracted $1.5 billion in the week ending Feb 3, reflecting their eighth straight week of inflows. During the week, funds exposed to domestic stocks saw a withdrawal of $6.5 billion.
Moreover, flows in Treasury funds were better than the other categories in the week ending Feb 3. Corporate investment-grade bond funds, emerging market debt funds and taxable bond mutual funds posted withdrawals of $1.5 billion, $415 million and $523 million, respectively. Meanwhile, high-yield municipal bond funds and commodities precious metals funds attracted $78.6 million and $893 million, respectively, in the week ending Feb 3, according to Lipper.
What is Boosting Treasury Demand?
China-led weak global growth, sluggish economic conditions in the U.S. and the relentless slide in oil prices have played important roles in dragging the markets down and boosting the demand for Treasury. Recently released data out of China revealed a stressed out economy against the backdrop of slow growth. In January, manufacturing activities contracted for the sixth straight month. The month also witnessed slowing down of the non-manufacturing sector. Moreover, China's foreign exchange reserves dropped $99.5 billion in January, following a $107.9 billion drop the month before, hinting at the country's inability to stem capital flight and attaining a stable exchange rate.
In the U.S. too, weak domestic economic data signaled a slowdown. Though the unemployment rate declined to 4.9% in January, the lowest level since 2008, and average hourly earnings gained almost 0.5% from $25.39 in the previous month, the Bureau of Labor Statistics (BLS) reported that the economy generated only 151,000 jobs compared with December's job number of 262,000. Moreover, the ISM manufacturing index was below 50 in January, indicating contraction in activities for four consecutive months. The ISM services index fell from 55.3 in December to 53.5 in January, below the consensus estimate of 55.2.
Moreover, the "advance estimate" of the U.S. Department of Commerce indicated that the economy expanded at a meager pace of 0.7% during the final three months of 2015, lower than the 2% growth rate in the third quarter.
A sluggish global growth picture also raised doubts over the timing of the next rate hike, which was witnessed for the first time in 8 years in Dec 2015. This gave an added boost to the demand for treasuries as the rate of interest has an inverse relationship with bond prices.
3 Government Bond Mutual Funds to Buy
In such a backdrop, when investors are moving their assets from stocks to Treasury securities, we present three government bond mutual funds that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We expect the funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
These funds have steady three-month, year-to-date and one-year returns. The minimum initial investment is within $5000. Also, these funds have a low expense ratio and no sales load.
Hartford US Government Securities HLS Fund IA (MUTF:HAUSX) invests a large portion of its assets in securities that are affiliated by the U.S. government or its entities. HAUSX invests in U.S. Treasury instruments and other government securities. HAUSX may also invest in mortgage-backed securities of the U.S. government.
HAUSX currently carries a Zacks Mutual Fund Rank #1 and has three-month and year-to-date returns of 2.1% and 2%, respectively. HAUSX returned 2.5% in the past one year. Annual expense ratio of 0.48% is lower than the category average of 0.82%. HAUSX has an annual dividend yield of 1.75%.
American Century Government Bond Fund Investor (MUTF:CPTNX) seeks a high level of current income. CPTNX invests the lion's share of its assets in debt securities, including U.S. Treasury securities, issued by the U.S. government. CPTNX may also invest in securities of agencies that are backed by the government.
CPTNX currently carries a Zacks Mutual Fund Rank #2 and has three-month and year-to-date returns of 2.6% and 2.4%, respectively. CPTNX returned 2.2% in the past one year. Annual expense ratio of 0.47% is lower than the category average of 0.93%. CPTNX has an annual dividend yield of 1.59%.
BNY Mellon Short-Term US Government Securities Fund M (MUTF:MPSUX) invests the major portion of its assets in securities of the U.S. government and its affiliates. MPSUX may invest a maximum of 35% of its assets in government mortgage-related securities. MPSUX is expected to maintain an average effective portfolio maturity of below three years.
MPSUX currently carries a Zacks Mutual Fund Rank #2 and has three-month and year-to-date returns of 0.9%. MPSUX also returned 0.9% in the past one year. Annual expense ratio of 0.54% is lower than the category average of 0.93%. MPSUX has an annual dividend yield of 1.11%.