Bond Funds: Safe Again For A Short Term Ride

In 1994, many short-term bond fund investors had a rude awakening. They thought they had parked their money in a relatively safe place. So they were shocked to see funds fall as much as 10% because managers had bet heavily on risky derivatives at a time when interest rates were shooting up. Furious holders of PaineWebber's Low Duration U.S. Government Income Fund--down more than 4%--sued, prompting the firm to infuse $33 million into the fund and change the manager.

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