Bond Funds Bask In Popularity

SOME five months ago, about the time interest rates began to decline, Alliance Capital Management LP, started up a new mutual fund for bonds with maturity dates of no more than five years. Talk about timing! Since then, the fund, the Alliance Multi-Market Strategy Trust, has "taken off" in a big way, says Linda Finnerty, a spokeswoman with the financial management company.Since May, the new bond fund, which invests in bonds of various currencies to hedge against share-price volatility, has accumulated some $670 million in assets. And sales continue at high levels. Meantime, Ms. Finnerty notes, other Alliance bond funds are also posting substantial sales. Bonds - particularly bond funds - are suddenly very hot commodities. Bond funds grew substantially during the second and third quarters, according to Erick Kanter, an official of the Investment Company Institute in Washington. In July and August alone, bond funds snapped up $13.9 billion in new monies, according to Lipper Analytical Services. Nor is that pace believed to be slackening. "A combination of declining yields on short-term investments, such as certificates of deposits and money market accounts, and long-term interest rates remaining relatively high, what economists call a deepening yield curve - meant that "yields were better on bonds than from alternative investments," Mr. Kanter notes. In addition to getting the higher yields, the bond-fund holder can also gain in terms of an appreciation of share value, or price. Share values move in the opposite direction of interest rat es; as interest rates decline, share values rise, or vice versa. A three-month Treasury bill now pays about 5.01 percent, compared with 7.21 percent a year ago. Money market accounts now pay about 5.16 percent; a one-year bank certificate of deposit about 5.6 percent. Ah, but bond funds are yielding from 6 to 8.5 percent or better. "You have to understand the underlying motivation of investors moving into bond funds," says Neal Litvack, vice president for marketing with Fidelity Investments, Boston. "Much, perhaps most, of this flow is for higher yields; people are buying up on [bond] yields to get where they were with yields a year ago with [bank] certificates of deposit." And he notes that the people who buy bank CDs tend to be long-term investors who "don't react to short-term blips" in the market, such as occurred last week whe n long-term Treasury bond prices fell because of the failure of the Federal Reserve Board to cut interest rates. Fidelity has some 30 bond funds. But most of the sales, involving two-thirds of new bond sales for Fidelity, are in short- to intermediate-term government bond funds, where bonds have terms of two to 10 years, Mr. Litvack says. Even if long-term bond prices continue to fall, more money can be expected to flow into bond funds, experts here say. The "golden goose" for the bond funds is the prospect of billions of dollars now invested in lower-yield CDs shifting over to bond funds during the next few months. According to a new survey, less than one-third of Fidelity investors with CDs coming to maturity in October plan to roll over their CDs. More than half the investors are considering other options. Historically, October has been a big month for rollovers on bank CDs. Billions of dollars were invested in bank certificates as investors fled the stock market after the downturn of October 1987. Subsequently, they tended to simply renew their CDs. Now, given low interest rates on CDs, investors are looking for better yields. Arnold Moskowitz, chairman of Moskowitz Capital Consulting Inc., predicts that some $36 billion will flow out of bank CDs between October and December of this year. Of that total, he sees $8 billion a month flowing into bond funds - a total of $24 billion. Financial consultants note that investors need to be cautious regarding bond funds; if interest rates start to scoot back up, then bond prices will head southward, as happened last week.