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08.11.03
Many of you know that the bond market has come under considerable pressure in the last month or so. But not all bond funds have been affected the same way just as all bonds are different. Mr. Gross' fund lost a total of 3.8% in July chalking up the worst month for the fund ever. The category in which Mr. Gross' fund is benchmarked is down 3.24% for the same period. Specializing in intermediate bonds for his portfolio, the change in return is due largely to the sudden jump in the yield of the 10 year Treasury. Up 1.16%, this type of bond has plummeted in price, the reaction to rising yields.

Even Mr. Gross, caught unaware, did not anticipate such a violent sell off in the category. We are confused as well. Inflation is hovering around 1%. Deduct that from the yield of a 10 year note and the real return in somewhere around 3.5%. This not bad for the conservative investor and if you have a drawer full of these bonds, you should be sitting pretty. The sellers were the late arrivers to the dance. These folks pushed up the price of bonds to levels that many considered to be "ballooned".

Now that those folks have sold off and moved back into equities, most likely chasing last quarter's returns, the bond market is beginning to look like a good place for owners of money market funds. These funds, even performing at their best are yielding just shy of 1%. That is not beating inflation, let alone the taxes on that pittance of a gain. Owners of these funds might take a good look at the bond market right now.

Why besides cheaper prices and higher yields should you invest in bond funds now? If you need more reasons than that, here's another: With most of the selling done, also according to Mr. Gross, there is the hopes that prices will moderate. At least a little.

And another, it should go without saying is diversification. Stock mutual funds will always have a margin of error, but bonds tend to have a much less chance of dramatic dives. The bond market, even if it continues to decline will not hurt the funds that hold them too bad. Interest rates are low now and are probably going to move higher, even if the F.O.M.C. makes no moves on Tuesday.

So why the hoopla about the sell-off? Mr. Gross' Total Return Fund has chalked impressive and sometimes double digit returns for his shareholders (almost 12% in 2000) and those historic returns are hard to shake off. The question is what should you do if you are looking to diversify?

Many funds will be able to trim their holdings in Treasuries but will not be able to do entirely without. Look for funds that have a short term exposure. There will be considerably less rate volatility. Treasury Inflation Protected Securities or TIPS should yield about 2.5% but probably shouldn't be the only kind of bond you own. Tax-exempt municipal bonds were cited by Mr. Gross as a good place as budget pressures by state and local government shortfalls make them attractive.

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