Bond-Fund Buyer Beware

They're not bonds, and they don't behave the same way

Investors are courting an old flame: bond mutual funds. But how sincere are their intentions? The relationship sputtered in 1994, when bond funds logged their worst year in six decades and investors fled the church in a panic. Now they're back for another fling. In January net new cash flowing into bond funds surged to an estimated $11.5 billion--the most since August 1993. The disturbing thing is that people probably don't understand this fickle mate any better today than they did in 1994.

The underappreciated irony of bond funds is that while they invest in bonds they don't behave like them....

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