When interest rates are expected to rise, the manager sells the longer term bonds and purchases shorter term bonds to reduce the loss. Shorter term bonds do not fall as much in value when interest rates rise. Because there is a limited pool of government bonds on the market at any one time, all managers buying bonds for mutual funds are buying from the same pool. This means that Treasury bond funds from different mutual fund providers will contain many of the same bond issues. For this reason, searching for a fund with the lowest annual fees and without a sales fee will produce an overall higher return.
Mutual funds are different from certificates in that they pay only a dividend.
The principal is reinvested back into the fund. This causes daily fluctuation of the market value of shares. The value of these funds falls when interest rates drop because homeowners refinance their mortgages. The principal received by the fund must then be reinvested at a lower rate, which causes the value of the fund to fall. Funds containing mortgaged-backed securities are available in many varieties.