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Fund Spy

The Great Yield Chase

A look under the hood shows that many core bond funds have continued their quest for income.

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We've been watching and discussing the trend for some time, and it doesn't appear that core bond fund managers are letting up. With Treasury yields at rock-bottom, and worry about the eventuality of rising rates gripping many investors, there are plenty of funds that continue to tilt away from the broad-market investment-grade bellwether, the Barclays U.S. Aggregate Bond Index.

The data is tricky to pin down, but the picture is clear. We've written in the past about how much funds' correlations have drifted away from the Barclays index. One reason for this is the divergence between the performance of certain subsectors--think corporates and agency mortgages--and the Treasury-heavy index itself. But there's also continued evidence that many--though certainly not all--managers are treading lightly in Treasuries. Indeed, while it's not unusual for funds in the intermediate-term-bond category to underweight Treasury and agency bonds, they have, on average, about 30% exposure to those sectors versus more than 46% in the Barclays U.S. Aggregate Bond Index. Typical funds' agency mortgage stakes are also below those of the index. That leaves considerable room for other sectors that are either lightly represented in the index, or not at all.

Eric Jacobson has a position in the following securities mentioned above: PTTRX. Find out about Morningstar’s editorial policies.