Why Is My Bond Fund Pulling in Its Horns?
A familiar problem has many managers taking risk off the table.
Numerous managers that we cover have expressed difficulty finding bonds with attractive valuations. With the exception of a few market sell-offs in recent years that made prices more attractive for a bit, that’s an issue that has become more and more pronounced as investors have snapped up bonds with attractive yields, driving up their prices. After backing up during the 18 months prior to 2016, for example, yield premiums (as measured by option-adjusted spreads) for bonds in the Bloomberg Barclays Investment Grade Corporate Index have since ground down to an average of less than 90 basis points at the end of 2017, from nearly double that level a year earlier. That’s especially notable given that the index’s last flirtation with a figure that modest was in February 2007, at the leading edge of the financial crisis.
And not unlike the later years of previous credit cycles, fund managers have also taken note of deterioration in the standards that corporate borrowers are being held to when setting the terms of their bonds and loans. That often means bank loans pledged with the security of second liens, in contrast to the most secured status leveraged bank loans normally carry.
Eric Jacobson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.