Key Takeaways
- • Vanguard's Arvind Narayan, co-head of a $55 billion bond fund, told Reuters that "this is not the time to be a hero," advising selectivity and conservatism in a tumultuous bond market.
- • Reuters spoke with eight of the largest US bond fund managers, collectively overseeing nearly $700 billion, and most are avoiding big macro bets in favor of higher-quality holdings.
- • The Bloomberg Aggregate Index is down 1% year-to-date, its worst performance since 2022, though most active managers are beating the index while still in negative territory.
- • The 30-year Treasury yield exceeded 5.46%, its highest since 2004, while the 10-year yield reached 5.14% after touching a 19-year high.
- • Managers broadly favor short-dated, high-quality assets, residential and asset-backed mortgage securities, and selective exposure to AI-related corporate debt, which many view as expensive relative to its risk.
Summary
Vanguard senior bond fund manager Arvind Narayan summarized the mood among leading US bond managers after a difficult year for fixed income: "This is not the time to be a hero." Reuters interviewed eight of the largest US bond fund managers, who collectively oversee nearly $700 billion. Most said they are avoiding large macro bets and instead searching carefully for higher-quality investments.
The Bloomberg Aggregate Index is down 1% this year, its weakest showing since 2022. Although most active managers are outperforming the benchmark, they remain in negative territory year-to-date. Treasury yields have risen partly on inflation and deficit concerns, while corporate bond valuations appear stretched and AI-related debt issuance is heavy. PIMCO chief investment officer Dan Ivascyn, whose Pimco Income Fund is the largest actively managed bond fund at $231.8 billion, cited fiscal policy, geopolitical developments and the economic fallout from the AI spending boom as risks, producing "fatter tails, more extreme potential outcomes."
Higher starting yields are a partial cushion. Yields on the 10-year Treasury near 5% are creating buying opportunities, according to several managers, and income can offset price declines in a way it could not during the 2022 selloff. On the Thursday covered by the report, long-dated US borrowing costs reached their highest level in more than 20 years, with the 30-year yield above 5.46%.
Manager positioning is broadly consistent. Vanguard's Narayan favors short-dated, diversified exposure including investment-grade corporates, asset-backed securities and agency MBS. Capital Group's Pramod Atluri, who oversees the $100 billion American Funds Bond Fund of America, sees value in longer-dated Treasuries and says the best AI-related corporate issues offer "AA risk at BBB prices." PIMCO is buying asset-backed and residential mortgage-backed securities while viewing corporates as richly valued. Fidelity's Julian Potenza prefers short-term, high-quality spread assets and has been selective on hyperscaler debt. JPMorgan Asset Management's Ed Fitzpatrick is increasing investment-grade and securitized credit allocations while waiting for more attractive yields on AI-linked issues. BlackRock's Russell Brownback is scrutinizing lower-quality high yield and subprime asset-backed securities for stress, and Baird's Warren Pierson is underweight longer-term Treasuries in favor of shorter-dated corporates.
Reuters reporting was by Suzanne McGee, with additional reporting by Lewis Krauskopf.
The Bloomberg Aggregate Index is down 1% this year, its weakest showing since 2022. Although most active managers are outperforming the benchmark, they remain in negative territory year-to-date. Treasury yields have risen partly on inflation and deficit concerns, while corporate bond valuations appear stretched and AI-related debt issuance is heavy. PIMCO chief investment officer Dan Ivascyn, whose Pimco Income Fund is the largest actively managed bond fund at $231.8 billion, cited fiscal policy, geopolitical developments and the economic fallout from the AI spending boom as risks, producing "fatter tails, more extreme potential outcomes."
Higher starting yields are a partial cushion. Yields on the 10-year Treasury near 5% are creating buying opportunities, according to several managers, and income can offset price declines in a way it could not during the 2022 selloff. On the Thursday covered by the report, long-dated US borrowing costs reached their highest level in more than 20 years, with the 30-year yield above 5.46%.
Manager positioning is broadly consistent. Vanguard's Narayan favors short-dated, diversified exposure including investment-grade corporates, asset-backed securities and agency MBS. Capital Group's Pramod Atluri, who oversees the $100 billion American Funds Bond Fund of America, sees value in longer-dated Treasuries and says the best AI-related corporate issues offer "AA risk at BBB prices." PIMCO is buying asset-backed and residential mortgage-backed securities while viewing corporates as richly valued. Fidelity's Julian Potenza prefers short-term, high-quality spread assets and has been selective on hyperscaler debt. JPMorgan Asset Management's Ed Fitzpatrick is increasing investment-grade and securitized credit allocations while waiting for more attractive yields on AI-linked issues. BlackRock's Russell Brownback is scrutinizing lower-quality high yield and subprime asset-backed securities for stress, and Baird's Warren Pierson is underweight longer-term Treasuries in favor of shorter-dated corporates.
Reuters reporting was by Suzanne McGee, with additional reporting by Lewis Krauskopf.
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