What Bond Gurus Are Saying About the Market Sell-Off

(Bloomberg) -- Investors are turning conventional wisdom on its head. During stock market routs, they’re often expected to move into bonds for comfort. That hasn’t happened.

As stock volatility rose in October, investors pulled a net $14.2 billion from taxable bond funds, the worst month since December 2015, Morningstar Inc. estimated. And, they withdrew another $7 billion in the first two weeks of November, according to the Investment Company Institute.

So as bond funds battle rising rates and widening credit spreads, is now a good time to pivot to fixed-income? Here’s what some top bond managers have to say.

Mark Kiesel

Chief investment officer for credit, Pacific Investment Management Co.

• View: “The combination of slower global growth, higher interest rates and a potential trade war with China are finally slowing the U.S. economy and hitting U.S. equities. This in turn is pressuring credit spreads wider. We continue to favor a defensive positioning in credit,” he said in an email.
• Advice: On a scale of one to 10, a lot of assets are twos and threes -- not attractive, he said. Potential opportunities are emerging in select interest-rate sensitive U.S. areas, such as energy and in the global consumer sector. “I’ll let you know when I start to see some 7s or 8s,” he wrote.
• Performance: The $12.4 billion Pimco Investment Grade Credit Bond Fund is down 3.23 percent this year through Nov. 21.

Michael Buchanan
Deputy chief investment officer, Western Asset Management Co.

• View: “We don’t think this is the beginning of the end. The market from our perspective, in many cases, is offering very compelling value. But we have to recognize it’s incredibly volatile right now,” he said in an interview Nov. 20.
• Advice: Prices of investment-grade credit have fallen so far that there are pockets of value, especially for debt maturing within five years, he said. Banks and financials typically benefit from rising rates.
• Performance: The $23.8 billion Western Asset Core Plus Bond Fund is down 3.74 percent this year.

Scott Minerd
Chief investment officer, Guggenheim Partners Investment Management

• View: A wave of “fallen angels” -- downgrades of BBB-rated corporate debt -- could overwhelm the high-yield market as the economy slows and higher rates raise the debt burden, he wrote in a Nov. 19 note. Recession could come in the first half of 2020.
• Advice: Move up in credit quality, to A from BBB, while spreads are relatively narrow.
• Performance: The $10.6 billion Guggenheim Total Return Bond Fund is little changed this year.

Tad Rivelle

Chief investment officer for fixed income, TCW Group Inc.

• View: “The margin of safety is gone. You see that in the pricing, in the standards. You see it in the bank loan market, in the investment-grade market. I don’t know when it’s going to break or when it’s going to blow, but when you have a very limited margin of safety, it doesn’t take much to shift the mind of the investor or the zeitgeist of the investment community,” he said in an interview Nov. 21.
• Advice: The cycle is ending, so embrace the “anchor to windward” approach, he said. If you get defensive, opportunities will come.
• Performance: The $70.3 billion Metropolitan West Total Return Bond Fund is down 1.71 percent this year.

Michael Hasenstab
Chief investment officer for global macro, Franklin Resources Inc.

• View: “Because bonds and equities were equally propped up by Fed intervention, they have been equally vulnerable to the opposite effect as Fed policy unwinds,” he said in a note released Nov. 21. “Investors that are not prepared for concurrent price corrections in U.S. Treasuries and other asset classes in 2019 may be exposed to unintended risks.”
• Advice: Local-currency emerging market debt shows the highest level of undervaluation across global fixed-income markets, he said.
• Performance: $34.9 billion Templeton Global Bond Fund is up 1.88 percent this year.

Dan Fuss
Vice chairman, Loomis Sayles & Co.

• View: “The biggest thing that’s happened with credit during the current turmoil is that liquidity has been greatly reduced in the corporate bond area,” he said in an email. “What liquidity there is, is much better in the very high grade names, big issuers, than in the lower rated. Many parts of high yield are essentially quotes only.”
• Advice: There are some potential opportunities now in older -- not newly issued -- investment-grade and high-yield debt. But, in dollar terms, they are tiny, he said.
• Performance: The $11.4 billion Loomis Sayles Bond Fund lost 1.58 percent this year.

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alan Mirabella, Melissa Karsh

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