It’s shaping up as another tough year for bonds. The Federal Reserve has signaled it will continue to take a hard line on interest rates, and that’s meant pain for bond funds. The positive side is it also means they have some robust yields.
Yield-chasing is a dangerous game if you just go by yield to the exclusion of everything else. So, I thought I would look for the highest yields among funds with Morningstar Medalist Ratings of Gold. You won’t get the highest yields in the Morningstar Category, but you will get excellent managers and strategies that ought to lead their funds to good opportunities that aren’t too risky. All the funds mentioned here have High ratings for their People and Process Pillars and Gold overall ratings.
T. Rowe Price Floating Rate PRFRX has a big yield of 8.9% (30-day yield), and it has even notched decent returns north of 8% this year. That generous payout may not last as bank loans adjust with shifts in rates. However, it may remain pretty high for a while given the Fed’s stance. In the meantime, that’s a robust payout. Paul Massaro is a veteran manager supported by a strong team of credit analysts who figure to make losses tolerable when a recession bites.
PGIM High Yield PBHAX has a nifty 7.5% yield, and falling rates won’t hurt it. A recession certainly would, but Robert Spano has made this fund one of the category’s best. The fund did lose 11.9% in 2022, so it’s subject to the same risks as most high-yield funds.
Fidelity Total Bond FTBFX has a yield of 5.8%, and it is doing that with a portfolio that is mostly investment-grade. By mandate, the strategy can hold up to 20% in below-investment-grade fare and has sometimes taken advantage of that flexibility. As credit rallied in 2021, it held high allocations to most of the plus sectors, including at least 15% in high-yield credit throughout the year, based on improving global growth and solid credit fundamentals. This was a good call and boosted its 2021 return past most peers. Throughout 2023, the team has moderately trimmed its credit risk overweighting given valuations, and it also has taken advantage of any shocks to a slowing but still resilient U.S. economy. From the start of 2023 through July, the team modestly cut its high-yield exposure to 14% from 15% by trimming the corporate and loan sleeves.
Dodge & Cox Global Bond DODLX boasts a 5.8% yield and the best five-year returns in the global bond category. Dodge leverages its expertise in company research to build a corporate-bond-heavy portfolio that spans the globe. The fund offers appealing diversification and a low fee.
Fidelity Investment Grade Bond FBNDX has an appealing 5.3% yield with only moderate amounts of risk. Comanagers Jeff Moore and Michael Plage seek to formulate a coherent view of the broad investment landscape. They then populate the portfolio with individual bonds and adjust sector allocations and yield-curve positioning according to that view, while keeping the portfolio’s overall duration roughly in line with that of the Bloomberg U.S. Aggregate Bond Index. Alongside putting these portfolio contours in place, Moore and Plage consult a deep credit analyst bench to identify attractive securities.
Finally, we have Baird Short-Term Bond BSBIX with a 5.2% yield. Citing the difficulty of predicting interest-rate changes consistently, Baird’s approach begins with matching the fund’s overall interest-rate sensitivity, or duration, to that of the Bloomberg U.S. Government/Credit 1-3 Year Index. Aiming to beat this bogy by 15 to 40 basis points per year, gross of fees, the team tries to add value through yield-curve positioning, sector allocation, security selection, and competitive trade execution. Security selection and sector allocation among corporate, securitized (both agency mortgages and nonagency, high-quality securitizations), and government bonds receive the most focus.
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