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Fund Spy

Government Bonds and Risk Aren't Mutually Exclusive

There is no such thing as a free lunch when it comes to government bond funds that consistently out-yield their peers.

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In the early 1990s when investors were migrating out of CDs in search of bigger yields but still looking for safety, government bond offerings--usually heavy with mortgage securities--were very popular. At the beginning of 1993, intermediate-term government funds comprised more than a third the assets of all taxable-bond offerings. Today, this Morningstar Category accounts for only 3% of the money in taxable-bond funds.

Diminished interest from investors has arguably translated to fewer firms chasing market share with tricks of the trade to jack up their yields, something that was more rampant and destructive back when the group was much larger. There are still funds willing to take on extra risk to separate themselves from the pack, though.

Eric Jacobson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.