L10 BARRON’S•Funds Quarterly April 6, 2020
says Collins, “we believe most credit
spreads are extremely attractive and
issuers may be undervalued.” He and
his team are “not inclined” to go bar-
gain hunting among high-yield cred-
its from the hardest-hit sectors of
energy, commodities, travel, leisure,
and entertainment, he says—but
financials, utilities, certain health-
care, telecom, and technology compa-
nies are on their radar.
The $30 billion Western Asset
Core Plus Bond (WAPAX) is another
notable fund that got hammered in the
selloff, but it is still one of the best in the
category over the long term. The retail
fund was launched in 2012, but the
institutional shares have returned 5.3%
a year on average over the past 15 years.
The TCW Total Return (TGLMX)
rates within the top 7% for every single
trailing time period through 10 years—
but that is no surprise, given its 61%
allocation to mortgage-backed securi-
ties as of late last year.
You Want to Consider
All Your Options
The global fixed-income market is larger
than the global stock market, and infi-
nitely more nuanced and complex.
While issuers vary by industry, geogra-
phy, and credit profile, that’s only
scratching the surface. Managers also
need to navigate where a bond falls on
the hierarchy of payments, and consider
interest-rate and currency risks. Mean-
while, there is a whole world of assets
that looks nothing like traditional bonds.
Yet, these complexities can pave the
way for opportunities—especially formanagers who have leeway to move to
any sector of the bond market and, in
some cases, beyond. Multisector bondfunds typically hold up to two-thirds of
their portfolios in below-investment-
grade or unrated bonds.
Total return is the name of the game
for these strategies, but there is a
trade-off: “They generally offer less
diversification benefits relative to equi-
ties,” says Sjoblom, who adds that in-
vestors focused on long-term returns
might want to supplement their core
holdings with a smaller allocation to a
multisector bond fund.
As a group, these funds have suf-
fered. From Feb. 20 to March 20, multi-
sector funds fell 13%. It’s no surprise,
given that high-yield bonds—which are
nearly 40% of the category average—
suffered a double whammy of Covid-19
and an oil price war, which spilled over
from energy names to the whole sector.
At one point, high-yield spreads were
more than 10%, says DeMaso, which
meant the market was betting that half
of the companies issuing these bonds
would default within five years.
Yes, those spreads could widen
further—meaning prices fall—“but if
you can look out 12 months, and are
willing to weather a bumpy and uncer-
tain road, there is opportunity there,”
he says.
Manager skill, experience, and
research depth are tantamount in this
group. Up an average of nearly 7%
over the past 10 years, the $137 billion
Pimco Income (PONAX) has pro-
vided investors with steady returns
without the kind of gut-wrenching
volatility typical of many go-anywhere
strategies.B
Multisector
Bond Funds
Own corporate
and sovereign
debt, among
other bonds
39%
of assets are in
below investment-
grade bonds
TheMixed-UpMathofNegativeRates—andWhatItMeansforYou
N
egative interest rates have been the norm in many developed
nations for more than a decade, but the notion that U.S. inter-
est rates could drop below zero had seemed unfathomable—
until recently.
Actually, one-month and three-month Treasury bills briefly dipped
into the red zone in late March. If the bellwether 10-year Treasury’s
yield, which was recently 0.7%, moved into negative territory, it
would be symbolic, yes, but it wouldn’t have as dramatic an impact
as some investors fear.
What causes rates to go negative? One driver is central bank policy.
Following the financial crisis, European central banks rolled out neg-
ative rates to boost business and consumer lending in hopes of spur-
ring economic growth. Over the past decade, many countries have
instituted negative rates.
Whether the U.S. Federal Reserve will go to such lengths is up for
debate. But with rates currently near zero, it isn’t out of the question.
Meanwhile, there is another force that can drive rates below zero—
the market. Bond yields are a function of supply and demand. When
investors rush to buy government bonds, it drives up the price of a bond
and sinks the yield. The amount of money in negative-yielding sover-
eign debt peaked at $17 trillion in August, 30% of the global bond mar-
ket. It has since fallen to $10.6 trillion, 18% of the global market.
Does that mean bond investors lose money? Not necessarily. If you
buy a bond on the secondary market at a negative yield and hold it to
maturity, you will effectively lose money: The price you paid for the
bond is more than the principal you’ll receive when it matures.
However, if you trade the bond, you can still make money—as long
as the price of that bond goes higher, in turn driving yields lower. The
Bloomberg Barclays Germany Treasury Bond Index had a -0.1% yield
at the start of 2019 and has since returned more than 5%. “It has
been proved in other parts of the world that if rates go from 50 basis
points to minus 50 basis points, it’s still a gain,” says Jim Paulsen,
chief investment strategist at the Leuthold Group.
That might sound like tulip mania, but behind all of this are insti-
tutional buyers, such as insurance companies and pensions, that
need a safe place to park assets. Besides, interest rates can’t be
viewed in a vacuum. “It’s all about inflation expectations,” says David
Rosenberg, chief economist and strategist of Rosenberg Research. “If
your expectation is that the [consumer-price index] might go to mi-
nus 2%, which it could in the context of a recession, then all of a sud-
den even a no-yield bond would be giving you a 2% real return.”
What about bank deposits and loans? Negative rates are sometimes
talked about as a “storage fee,” but banks probably wouldn’t be so
bold as to charge for deposits; they can make more money on fees,
other services, and loans.
So do negative rates mean that consumers could get paid to borrow
money? Um, no. There is a floor on how low rates for mortgages and
other loans will go, and that is nowhere near zero.B