4 Mutual Funds to Invest in Despite Yield Curve Inversion

The yield curve’s recent inversion has given investors more reasons to panic amid trade tensions. As market volatility remained a factor in denting investors’ confidence in the stock market, yield curve inversion has brought government bonds in the limelight. 

Therefore, fund investors seeking to take minimal risks could opt for mutual funds that invest heavily in government bonds in these turbulent times.

Yield Curve Inversion Sparks Recession Fears

The return on the benchmark 10-year Treasury yield edged up slightly on Jun 4 (2.12%), although remaining largely lower than the yield on the 3-month Treasury bill (2.35%). The current scenario has attracted investor attention because, usually, the return on the bonds with a longer maturity periods is higher than that of those with lower maturity periods. This is because investors demand higher returns on their investments for longer durations, pushing the curve upward.

However, yield curve inversion indicates that investors aren’t very confident about the future of the economy and hence aren’t willing to bet on its long-term prospects. This could cause investors to stop spending and investing, leading the U.S. economy to contract and fall into a recession.

Morgan Stanley further noted earlier this week that the global economy could enter a recession in three quarters. Trade disputes are the prime reason behind this assessment. The investment bank said that global demand could get curbed by reduced capital expenditures.

In fact, J.P. Morgan Chase slashed its forecast for the 10-year Treasury yield to 1.75% from its previous forecast of 2.45% at year-end, following President Donald Trump’s threat to put tariffs on Mexican imports. This conforms to the possibility of the Fed lowering interest rates this year to sustain the economy.

Our Choices

We have, thus, selected four mutual funds that largely invest in government bonds and carry a Zacks Mutual Fund Rank #1 (Strong Buy). Moreover, these funds have encouraging one-year returns. Additionally, the minimum initial investment is less than $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Now we come to the second-most vital question: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Oppenheimer Rochester PA Municipal Y OPAYX fund aims for tax-free income. The fund invests the majority of its assets in Pennsylvania municipal securities, and in derivatives and other instruments that have economic characteristics similar to such securities.

This Zacks sector – Muni-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

OPAYX has an annual expense ratio of 0.91%, which is below the category average of 0.95%. It has an annualized return of 12.5%.The fund has no minimum initial investment.

Goldman Sachs High Yield Municipal Fund Investor Class GYIRX aims for a high level of current income exempted from regular federal income tax. The fund seeks capital growth. GYIRX invests heavily in fixed income securities issued by or on behalf of states, territories and possessions of the United States and the political subdivisions, agencies and instrumentalities thereof, the interest on which is exempt from regular federal income tax.

This Zacks sector – Muni-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

GYIRX has an annual expense ratio of 0.60%, which is below the category average of 0.93%. It has an annualized return of 8.3%.The fund has no minimum initial investment.

PGIM High Yield A PBHAX fund aims to maximize current income. The fund invests the majority of its assets in investable assets in a diversified portfolio of high yield fixed-income instruments rated Ba or lower by Moody's Investors Service or BB or lower by S&P Global Ratings, and instruments either rated by another nationally recognized statistical rating organization or junk bonds.

This Zacks sector – High Yield-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

PBHAX has an annual expense ratio of 0.80%, which is below the category average of 1.02%. It has an annualized return of 7.4%.The minimum initial investment for the fund is $2500.

Vanguard New Jersey Long-Term Tax-Exempt Fund Investor Shares VNJTX aims to generate current income exempted from both federal and New Jersey personal income taxes. The non-diversified fun mostly invests in high-quality municipal bonds that are issued by New Jersey state and local governments along with those issued by regional governmental and public financing authorities.

This Zacks sector – Muni-Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

VNJTX has an annual expense ratio of 0.17%, which is below the category average of 0.90%. It has an annualized return of 7.1%.The minimum initial investment for the fund is $3000.

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