By Suzanne McGee
PROVIDENCE, RHODE ISLAND, Sept 24 (Reuters) – A tumultuous ride for bonds this year has left Vanguard’s senior bond fund manager Arvind Narayan with one unequivocal message: “This is not the time to be a hero.”
Narayan, who co-heads a $55 billion bond fund, is one of eight of the largest US bond fund managers with whom Reuters spoke, collectively managing nearly $700 billion. Many of them say they are avoiding big macro bets and instead hunting carefully for higher-quality investments.
“It’s time to be selective, conservative, and pick your spots carefully,” said Narayan, co-head of investment-grade credit at Vanguard Group, and a senior portfolio manager of the Vanguard Short-Term Investment Grade Fund.
Treasury yields have climbed this year partly on inflationary and deficit concerns. Meanwhile, the corporate bond market holds valuation risks and there is a deluge of AI-related debt.
“If you’re not being paid to take risk, you shouldn’t be taking risk in a core bond portfolio,” said Pramod Atluri, a portfolio manager at Capital Group who oversees the $100 billion American Funds Bond Fund of America. “You can get your position blown up at any moment in time based upon changes in politics.”
The widely-followed Bloomberg Aggregate Index is down 1% this year, a lackluster performance for bonds and the worst since 2022. Although most of the active managers are beating the index, they are in the red year-to-date.
“People are always looking for the big call, but we’ve had a lot of singles just looking for good ideas here and there,” said Dan Ivascyn, chief investment officer at PIMCO, who manages the largest actively managed bond fund, the $231.8 billion Pimco Income Fund.
Risks run the gamut from changes in fiscal policy to geopolitical developments and the economic fallout from the AI spending boom, said Ivascyn. That’s led to “fatter tails, more extreme potential outcomes,” he added.
A saving grace is that yields have risen from a higher starting point than in the 2022 run up in yields, which hurt portfolios. That means investors are able to earn higher income, offsetting the fall in prices. Yields on the benchmark 10-year Treasury continue to hover around 5%, creating buying opportunities, some said.
“Starting yields really matter; they are an important input in total return,” said Potenza.
Here is a summary of each manager’s view as told to Reuters:
ARVIND NARAYAN, co-head of investment-grade credit, Vanguard
Short-dated bonds offer investors unusually attractive all-in yields, notes Narayan, who adds that he does not expect a repeat of 2022 losses because the market has already priced in future rate hikes. He favors high-quality, diversified exposure to shorter-term assets, including investment-grade corporate bonds, asset-backed securities and agency mortgage-backed securities. Calling AI spending the “elephant in the room”, Narayan said Vanguard works directly with issuers to negotiate deal terms.
DAN IVASCYN, chief investment officer, PIMCO
With no signs that conflict in the Middle East is stabilizing, and given the boom in AI spending, Ivascyn said he spends time thinking about macro issues. For now he is a buyer of asset-backed and residential mortgage-backed securities, but views corporate bonds as richly valued. Ivascyn does see opportunity in longer-dated Treasury bonds and views the Fed’s decision to bring inflation under control as a “good signal for the bond market.”
GREG PETERS, co-chief investment officer, PGIM Credit
The current market favors careful security selection and disciplined risk management, says Peters. “I don’t think those who simply say ‘buy credit’ will be rewarded.” Peters is boosting exposure to residential mortgage backed securities but says the higher yields of AI-related debt issuance does not make those bonds appealing yet.
JULIAN POTENZA, portfolio manager, Fidelity Investments
To navigate the recent market choppiness, Potenza favors short-term, high-quality spread assets and keeping credit risk near the low end of the team’s historic range. “Boring credits are not awful at this point.” That rules out many AI hyperscaler debt issues coming to market. “We’ve generally been quite selective in those deals.”
PRAMOD ATLURI, portfolio manager, Capital Group
Atluri, a “gradual contrarian”, finds value in longer-dated Treasuries as rates have moved higher and said that the Fed’s decision to raise rates would boost its credibility in fighting inflation. Atluri believes the best AI-related corporate debt issues give him the opportunity to acquire “AA risk at BBB prices.”
ED FITZPATRICK, portfolio manager & head of US rates strategy, JP Morgan Asset Management
Fitzpatrick finds “opportunities are not quite as abundant as they were in the past.” While boosting his fund’s allocation to investment-grade and securitized credit, he finds AI-linked corporate debt issues less interesting and is waiting for still higher and potentially more attractive yields, especially as jumbo deals can be “almost comparable to Treasuries” in size.
RUSSELL BROWNBACK, deputy chief investment officer of global fixed income, BlackRock
Higher yields make the bond market more resilient, despite daily price swings, Brownback says. “Volatility is the hare and carry (the income from higher yields) is the tortoise,” he said. He finds carefully-selected mortgages and securitized credit appealing, but is scrutinizing lower-quality high yield and sub prime asset-backed securities for signs of stress.
WARREN PIERSON, co-chief investment officer, Baird Asset Management
Pierson’s team is taking a conservative approach to fixed income investing, trying to “hit a lot of singles” through bottom-up security selection. Pierson says that means staying underweight longer-term Treasuries in favor of shorter-dated corporate securities, selected non-agency mortgages and AAA-rated securitized assets.
(Reporting by Suzanne McGee; additional reporting by Lewis Krauskopf; Editing by Megan Davies and Jonathan Spicer )
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