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3 Bond Mutual Funds to Gain From Fed's Balance Sheet Runoff

Zacks Equity Research
Danaher's (DHR) first-quarter 2019 results gain from sales growth and DBS initiatives. It lowers projection for 2019 to include the dilutive impact of the BioPharma buyout.

The much-awaited minutes from Federal Open Market Committee’s meeting held in January were released on Feb 20th. Almost all the Fed officials stated that they wanted to finish unwinding the humongous $3.8 trillion balance sheet by the end of 2019. They also look to reinvest the mortgage-backed securities (MBS) into Treasury after successfully finishing balance sheet unwinding.

Impact of Fed’s Balance Sheet Unwinding

The immediate effect of a balance sheet runoff from the Fed will be lowering of bond prices. This will also lead to rising interest rates. Higher interest rates make operations more expensive for companies, lowering their earnings or profits.

Lower corporate earnings drive stock prices down and higher interest rates weigh on bond prices. What does this mean for mutual funds? This leads to lower market values for both stocks and bonds in a fund’s portfolio. However, interest income from bond mutual funds increases. Interest income rises as portfolio managers buy bonds that are yielding more income, because market interest rates are higher during periods of restrictive Fed monetary policy.

3 Best Fund Choices

We have, thus, selected three bond mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to gain from such factors. Moreover, these funds have outstanding one and three-year returns. Additionally, the minimum initial investment is within $5000.

We expect these 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.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are the primary reasons why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Lord Abbett Intermediate Tax Free A LISAX invests 80% of its net assets in municipal bonds that are capable of paying interest exempt from federal tax. The fund aims for the maximum amount of interest income exempted possible from the federal income tax, with reasonable risk. LISAX uses the Bloomberg Barclays 1-15 Year Municipal Bond Index’s volatility as an approximation of reasonable risk.

This Sector - Muni-Bonds product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

LISAX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.70%, which is below the category average of 0.75%. The fund has one and three-year returns of 2.8% and 1.7%, respectively.

Putnam Absolute Return 100 Y PARYX seeks growth of returns by maintaining a well-diversified portfolio. This portfolio reflects several uncorrelated fixed-income strategies designed to utilize market inefficiencies across multiple fixed-income sectors and global markets.

This Sector - Diversified Bonds product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

PARYX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.40%, which is below the category average of 0.75%. The fund has one and three-year returns of 2.6% and 3.3%, respectively.

Fidelity Advisor California Municipal Income A FCMAX seeks tax-exempted high current income. FCMAX invests a large share of its assets in municipal debt securities that are rated as investment-grade and expected to pay interest income free from federal and California personal income taxes. FCMAX invests a minimum of one-fourth of its assets in municipal securities.

This Sector - Muni-Bonds product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FCMAX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.80%, which is below the category average of 0.86%. The fund has one and three-year returns of 2.4% and 1.5%, respectively.

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