Dan Ivascyn, group chief investment officer for PIMCO, speaks during a Reuters investment summit in New York City, U.S., November 5, 2019. REUTERS
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.”
