There are now 663 mutual funds that invest in various forms of U.S. government guaranteed obligations.

Question: how many of them can provide a higher return than a simple trip to the local bank to put money in a 5 year CD?

Answer: Not many. At the end of June, only 328. In other words, only half the funds could provide a yield equal to, or greater than, the 5.34 percent yield of the average bank CD.

Only 175 funds could provide a higher yield than the 5.99 percent average yield on a brokered 5 year CD. And only 122--- one in five--- could provide a higher yield than the 6.2 percent you could get buying a 5 year U.S. Treasury obligation.

In each case, you get the higher yield by taking more risk. As long term interest rates have come down the problem we wrote about in February is becoming more intense: most bond funds can't justify their existence. While bond funds once offered a substantial yield benefit for small investors, they now can't compete with the most popular traditional savings vehicles: bank CDs and relatively short term Treasury obligations.

How has this happened?

There are two reasons.

The first is the extremely narrow difference between short term yields and long term yields. Here, for instance, are recent figures for Treasury obligations from Bloomberg:

The Treasury Yield Curve

3 month	5.60%
6 month	5.64
1 year	5.69
2 years	5.93
3 years	6.03
5 years	6.20
10 years	6.44
30 years	6.85

You can raise your income a whopping 1.16 percent by moving from a 1 year maturity to a 30 year maturity. If you move from one year to 10 years, the gain is only 0.75 percent or 75 basis points. If you move from 5 years to 30 years the gain is only 0.45 percent or 45 basis points.

The "spread"--- the yield difference between one maturity and another--- is minuscule.

The second reason is the cost of marketing and managing government fixed income mutual funds. You can get a visceral understanding by contemplating what three varieties of fixed income funds offer.

FRONT END LOAD FUNDS. There are 209 government bond funds that charge a front end commission to the investor. These funds have an average expense ratio of 0.94 percent and an average commission cost of 3.75 percent. Recently, they offered an average SEC yield of 5.67 percent. Their yield, in other words, was lower than the yield of a 5 year brokered CD and it would take over 12 YEARS before the 5.67 percent yield would recoup the 3.75 percent commission compared to buying a CD at the local bank. In addition, your risk would be lower. (see yield table below).

DEFERRED LOAD FUNDS. There are 116 government securities funds with deferred load plans. In these funds you pay no commission up front but are subject to a declining back-end commission if you redeem your shares before a particular time. In order to recoup the marketing expenses, these funds generally charge a hefty 12b-1 fee in addition to their other expenses.

Recently, for instance, these funds had average expense ratios ( including 12b-1 fees) of 1.67 percent and offered SEC yields of 5.45 percent. Again, the yield is lower than you can get on a brokered 5 year CD and only slightly higher than you can get on an average 5 year CD at a local bank. Worse, to pay the yield AND cover the expense ratio, the fund needs to get a pre-expense yield greater than 7 percent on its portfolio--- that means the risk of long Treasury maturities or the volatility of mortgage securities.

GENUINE NO-LOAD FUNDS. There are 256 government securities funds with no front end load and no deferred loads. Recently, these funds had expense ratios that averaged 0.73 percent and offered SEC yields averaging 5.90 percent. While they beat front or deferred load funds hands down, they still subject the investor to more risk than a 5 year Treasury.

Now lets add expenses to yields--- the money we have to spend or reinvest--- to get the gross yield a portfolio must earn to make the payments... and compare the gross yield required to the yield on Treasuries and bank CDs.

Government Bond Funds Increase Risk Without Providing Yield

Instrument	Yield
5 year Bank CDs	5.34 percent
Avg Deferred Load	5.45 (Spendable net)
3 month Treasury	5.60
6 month Treasury	5.64
Avg. Load Fund	5.67 (Spendable net)
1 year Treasury	5.69
Avg. No Load	5.90 (Spendable net)
2 year Treasury	5.93
5 year brokered CD	5.99
3 year Treasury	6.03
5 year Treasury	6.20
10 year Treasury	6.44
Avg. Load Fund	6.61 (5.67% spendable plus 0.94 expenses
Avg. No load	6.63 (5.90% spendable plus 0.73 expenses)
30 years	6.85
Avg. Deferred Load	7.12(5.45% spendable plus 1.67 expenses)

Sources: Morningstar, Bloomberg

As you can see, the government securities funds have to take risks greater than 10 years to deliver spendable returns to investors that can be duplicated with a 3 month or 2 year Treasury. While genuine no-load funds offer the best risk/reward deal, they are still hard pressed to compete with the direct purchase of a 5 year Treasury note.

Bottom line: this is NOT a good time to think about putting money into any but a handful of no-load, low expense government security mutual funds. It is a good time to learn about how to participate in the monthly U.S. Treasury auctions of 5 year notes. More good news: unlike Treasury bills ( obligations of one year or less) which require a minimum investment of $10,000 or more, Treasury notes are usually auctioned with minimum investments of $5,000.

Next in topic: September 3, 1995