Bets on European Bonds Paying Off for Funds When fear gripped the European markets in April, the money manager Robert Tipp decided to buy more Portuguese government bonds. He figured that European officials wouldn't let the country turn into another Greece. "They wanted to have some success stories, and Portugal was one they wanted to keep in," said Mr. Tipp, who runs the Prudential Global Total Return Fund. Such contrarian bets are looking pretty smart right now. Last week, the European Central Bank pledged to buy huge amounts of the region's sovereign debt, potentially putting a floor under the prices of Italian, Portuguese, Spanish and Irish bonds. But bond funds may have to brace for a bumpy ride. Despite the progress, uncertainty looms. "You always have to be concerned with the exit strategy," Mr. Tipp said. With the extraordinary level of support from the central bank, mutual fund managers are reaping big returns on their purchases. Since April, Portuguese bonds are up more than 32 percent, making Mr. Tipp's fund one of the top performers this year. The gains are equally strong for Irish government bonds, and the debt of Italy and Spain has rallied in recent weeks as well. "This is a new chapter in monetary policy and a new chapter in the debt crisis," said Scott A. Mather, head of global portfolio management at the Pacific Investment Management Company, known as Pimco. It doesn't mean all the problems are solved, but this is a more effective and powerful program. Pimco funds went on a buying spree of Italian government bonds this spring and summer. Italy was making progress with important reforms, Mr. Mather said, but the anticipation of central bank support was also decisive in the manager's decision to buy Italian bonds. That was already being hinted at. In some ways, it's hard to see how the mutual funds can lose. The European Central Bank's recent move is intended to prevent the crisis from worsening. Without it, Europe could slip back into a vicious cycle where plunging government bond prices damage the financial system and the wider economy. Even so, the potential payoffs are far from guaranteed. Mutual funds hold bonds that don't pay back investors for many years. If a large investor tries to dump its holdings in a small market, the sales could drive down the prices of the country's bonds. The eventual returns will also depend on a country's willingness to stick to the reform plan. The central bank's bond-buying program will have strings attached to pressure countries to follow the measures. But some governments may balk at adopting them, or voters, tired of austerity, may remove pro-reform governments. Consider the situation of Franklin Templeton, the big mutual fund manager. It owned about $7.8 billion of Irish government bonds at the end of June, according to an analysis of Bloomberg data, which amounted to roughly 7 percent of the country's total government bonds. So far, the funds managed by Franklin Templeton have made nice gains on their Irish government bonds. In euros, the bonds have returned 21.2 percent this year, counting both price appreciation and interest payments. But it might be hard to sell the bonds in a hurry without depressing prices. The debt could also suffer if Ireland struggled to meet economic and political goals. Michael Hasenstab, who manages the Templeton Global Bond fund, which owns large amounts of the Irish bonds, has written publicly that he believes the country can tough it out. Lisa Gallegos, a spokeswoman for Franklin Templeton, said the fund had a "well-diversified and large asset base" that would help insulate "against the need to sell positions before their targets have been achieved." Then there are the outliers, the countries that may not benefit from the central bank's aid. For example, Hungary is in the European Union, but it does not use the euro currency. As a result, officials may have less incentive to bail out the country if its economic problems worsen, especially since Hungary's government has pursued policies that have unsettled the union and the International Monetary Fund. Hungarian government bond prices are up 15 percent this year, measured in the country's currency. But the debt could plummet if it appears that the government is unable to reach an agreement with the I.M.F. for a big credit line. "Up until recently I was kind of certain they'd get a program, but now I'm quite a bit less optimistic," said Daniel Hewitt, an analyst with Barclays. Other analysts believe the Hungarian government is drawing out negotiations so it can appear tough to the country's electorate. After a while, they say, it will ultimately reach an agreement and Hungary will get its loan program. That could ignite a rally in Hungary's bonds and its currency, aiding the bondholders. Along the way to a potential resolution, the tensions could create problems for bond fund managers. Legg Mason and Oppenheimer Funds both owned small amounts of Hungarian bonds at the end of June, according to Bloomberg. Franklin Templeton dominates the market. It alone held some $8.8 billion of Hungarian government bonds this summer, roughly 12 percent of the country's bonds. If nothing else, bond fund managers need to be prepared for the unknown. The sovereign debt crisis has proved an unpredictable beast in the last two years. Just when officials think they have it under control, another problem emerges. The resulting volatility can be painful for the managers. Mr. Tipp would know. While he has done well on recent purchases of Portuguese bonds, his earlier positions suffered. At the market nadir in January, he sold out of some Portuguese bonds that mature in 2037. Asked whether he took a loss on that investment, he said, "undoubtedly."