Government Bond Funds

Bond funds are designed for investors looking for an easy way to hold a portfolio of income-producing bonds. Investors interested in bond funds have many different choices. Corporate bond funds, municipal bond funds, and high-yield bond funds are just a few of the types of mutual funds that invest in income-producing bonds. Investors comparing bond funds should remember that the bond funds with the highest yields are not always the safest funds. Investors searching for the best CD rates are protected by FDIC insurance, which levels out the risk when comparing different banks. As long as an individual depositor keeps less than $250,000 at a single bank, then FDIC insurance covers the depositor against loss of principal. Bond funds, however, can vary widely in terms of risk and potential price fluctuations from fund to fund. Investors evaluating bond funds have to factor in interest-rate sensitivity and default risks to make an informed decision.

Government bond funds that primarily invest in US government securities offer investors a safer bond fund alternative than many other type of bond funds. The creditworthiness of the US government helps government bond funds face less default risk in their portfolio than bond funds that hold commercial paper, municipal bonds, or corporate bonds. The rate of return on a government bond fund is determined by changes in the price (net asset value) of the fund and the distributions that are paid out by the fund. The interest rate decisions of the Federal Reserve can directly affect the price of short-term government bond funds, while long-term government bond fund prices are more market-driven. The duration of a government bond fund is the weighted average of the time to maturity of the bonds held in the portfolio. In general, government bond funds with shorter durations will experience less interest rate sensitivity.

The large drop in US Treasury yields in 2010 has helped boost the year-to-date (YTD) returns of many long term government bond funds to over 8%, while many short term government bond funds have year-to-date returns in the 2% to 3% range. These returns have compared very favorably to safety-oriented investment alternatives. Looking forward, many market experts question whether government bond funds can continue to outperform if the US economy begins a stronger recovery. An increase in interest rates can lead to lower prices for government bond funds and even possible losses for investors. MoneyRates.com is listing several funds under each bond fund category below to give investors a head start in their search for the best government bond funds. Check a fund's prospectus for complete information regarding fees, expenses, holdings, and investment goals before investing.

Short-term Government Bond Funds

Short-term government bond funds invest primarily in U.S. government securities with maturities of less than five years. These securities may include Treasury bills, notes, bonds, mortgage-backed securities issued by government lending agencies and other Treasury securities with maturities less than five years. Cash instruments including money market accounts, money funds, and CDs can also be utilized by portfolio managers. Short-term government bond funds are typically less volatile to interest rates changes than intermediate or long-term government bond funds. Larger funds in this category with their current yields, year-to-date (YTD) returns, and minimum investment requirements include:

Intermediate-term Government Bond Funds

Intermediate-term government bond funds are 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. Larger funds in this category with their current yields, year-to-date (YTD) returns, and minimum investment requirements include:

Long-term Government Bond Funds

Long-term government bond funds are funds that primarily invest in U.S. government securities with maturities ten years and longer. Bond fund holdings may include Treasury bonds, mortgage-backed securities issued by government lending agencies and other Treasury securities with longer maturities. Some long term government bond funds seek to provide investment results that outperform the Long Treasury Bond Index. Larger funds in this category with their current yields, year-to-date (YTD) returns, and minimum investment requirements include:

Inflation-Protection Funds

Inflation-protection funds are funds that are targeted to match or exceed the rate of inflation in the U.S. economy. Inflation-protection funds are designed for investors seeking inflation protection in their portfolios. Rates of return are expected to correspond to the general increases and decreases in inflation in the U.S. economy, but can vary from fund to fund as portfolio managers utilize different inflation strategies. Funds in this category include:

Returns and yields are not updated daily and may not be current. Front-end or deferred fees may apply. Check with an advisor regarding suitability of an investment before purchasing.

Last Updated: 7/27/10