Lipper Inc's quarterly report on mutual funds shows that fixed income funds outperformed equity funds in the third quarter of the year.
Overall, fixed income investors benefited from a cooling off in US economic growth and a stable inflation environment. Inflation erodes the gains from fixed income investments, making them sensitive to any changes in short term interest rates made by the Federal Reserve. The Fed has just voted to leave official US short term interest rates unchanged at 6.50% but warned that inflationary risks remain.
US tax-exempt fixed income funds rose 2.24%, while taxable fixed income funds gained 1.62% for the three month period ended Sept. 30. Equity funds however managed a rise of only 0.54% in the period. Year-to-date, tax exempt funds are up 5.99%, having benefited from dwindling supplies of long term treasuries, while taxable funds are up 3.79% in the same period.
'Continued volatility in the equity market appeared to prompt some rotation into fixed income instruments, which helped bolster the performance of taxable and tax-exempt fixed income funds,' said the Lipper report. Some weakness crept in in September, however, due to the ten-year high in crude oil prices and a decline in the value of the euro.
The United States, along with the other Group of Seven central banks intervened in the market to support the European single currency, which has shed about 25 percent of its value since its birth in January 1999.
Additionally, President Clinton's decision to authorize a tapping of the strategic oil reserve in a bid to lower fuel costs, did 'provide some relief for fixed income funds', the report said.
Although US fixed income funds made gains, 'world income funds lost a modest 0.20% as weakness in international income funds was partially counterbalanced by a robust increase in emerging market debt funds,' the report noted.
Emerging market debt funds notched 3.26% gains in the third quarter.
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