Bond Funds Bring It on Home
With bargains scarce, some core bond managers aren't taking too many chances.
There's been much discussion of bond-fund managers increasingly investing beyond the confines of the high-grade U.S. bond market in recent years. That seems intuitive: Yields on high-quality U.S. bonds have plumbed new lows, pushing investors into relatively higher-yielding sectors, such as emerging-markets bonds, junk corporates, and nonagency mortgages. Prominent managers such as PIMCO's Bill Gross have also made widely telegraphed moves in this direction, particularly in diversifying among "clean dirty shirt" developed and emerging sovereigns. And as my colleague Eric Jacobson noted previously, correlations between actively managed bond funds and the Aggregate index have been on the decline since 2008's credit crisis.
While some core bond funds are certainly following the prompting of the Federal Reserve (and the Bank of Japan, the European Central Bank, and the Bank of England) into riskier territory, the trend may be overstated. For one, correlations between certain bond sectors and the Aggregate index--including investment-grade corporates and agency mortgages, which make up close to half the index combined--have themselves declined in recent years, while the index's correlation with Treasuries has risen. That partly reflects the changing composition of the Aggregate index, as the Treasury department's bond issuance has outpaced that of other eligible sectors. Treasuries currently account for 36% of the index, up significantly from just 22% at the end of 2007.
Miriam Sjoblom has a position in the following securities mentioned above: PTTRX. Find out about Morningstar’s editorial policies.