Government Bond Funds and Inflation-Protected Funds Outperform

Government bond funds are a favorite of investors due to the safety of the underlying holdings which are primarily securities issued by the Treasury Department or government-sponsored entities. While normal bond fund managers can buy riskier lower-rated bonds to boost yields, the government bond fund manager is heavily restricted to the type of holdings in their funds. Interest-rate risk is always a factor with bond funds, but in general the shorter the duration of the holdings in the fund the less volatile the returns of the fund will be. Below are some funds which have been identified by Morningstar as out-performing funds:

Short-term Government Bond Funds

Funds that primarily invest in U.S. government securities which may include Treasury bills, notes, bonds, mortgage-backed securities issued by government lending agencies and other Treasury securities with maturies less than five years.

JP Morgan Treasury and Agency Select (OMBAX) - yield 4.51%, YTD return 2.34%, 2007 return 6.56%, expense ratio 0.65%, minimum investment $10,000
Vanguard Short Term Treasury (VFISX) - yield 4.11%, YTD return 2.63%, 2007 return 7.62%, expense ratio 0.26%, minimum investment $3,000
Vanguard Short Term Treasury (VSGBX) - yield 4.34%, YTD return 2.11%, expense ratio 0.20%, minimum investment $3,000
Fidelity Spartan Short (FSBIX) - yield 4.17%, holds 97% securities rated AAA primarily US Treasuries, average maturity of holdings 2.40 years, 2007 return 7.71%, minimum investment $10,000

Intermediate-term Government Bond Funds

Funds that primarily invest in U.S. government securities which may include Treasury bills, notes, bonds, mortgage-backed securities issued by government lending agencies and other Treasury securities with maturities typically between five and ten years.

Morgan Stanley U.S. Government (USGAX) - yield 4.48%, holds 100% securities rated AAA primarily U.S. Treasuries and government mortgages securities, average maturity of holdings 6.30 years, 2007 return 6.50%, minimum investment $1,000
Vanguard GNMA (VFIIX) - yield 5.09%, YTD return 1.50%, expense ratio 0.21%, minimum investment $3,000
Fidelity Government Income (FGOVX) - yield 4.34%, YTD return 2.11%, expense ratio 0.20%, minimum investment $3,000

Long-term Government Bond Funds

Funds that primarily invest in U.S. government securities which may include Treasury bills, notes, bonds, mortgage-backed securities issued by government lending agencies and other Treasury securities with maturities typically ten years and longer.

Vanguard Long-Term US Treasury (VUSTX) - yield 4.50%, YTD return 1.58%, expense ratio 0.26%, minimum investment $3,000
T Rowe Price US Treasury Long Term (PRULX) - yield 4.28%, YTD return 1.85%, expense ratio 0.55%, minimum investment $2,500

Another type of fund which has performed well in the last year are inflation-protected funds. These funds are heavily invested in Treasury Department securities and are designed to match the rate of inflation in the US economy.

Inflation-Protection Funds

Fund which specifically target offering a return that exceeds or matches inflation are available for investors who might need inflation protection in their portfolio.

Franklin Real Return A (FRRAX) - yield 3.81%, 2007 return 9.83%, $1,000 minimum investment
DWS Inflation Protected Plus (TIPIX) - yield 4.71%, 2007 return 11.57%, $1,000,000 minimum investment
State Farm Interim (SFITX) - yield 4.39%, 2007 return 7.41%, $250 minimum investment
Hartford Inflation Plus A (HIPAX) - yield 3.83%, 2007 return 11.58%, $1,000 minimum investment
Schwab Inflation Protected Select (SWRSX) - yield 4.26%, YTD return 6.90%, $50,000 minimum investment