It's been a tough year for bond managers. Returns are low and tightly bunched across sectors, underscoring the fact that fixed income has...

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It’s been a tough year for bond managers. Returns are low and tightly bunched across sectors, underscoring the fact that fixed income has been a difficult area in which to shine. But some funds have managed to do just that.

With bond yields low and few opportunities in the corporate market, “there have been relatively few ways for managers to distinguish themselves from the rest of the pack this year,” said Scott Berry, an analyst with Morningstar.

Returns have been clumped in a tight range, with the average short-term fund gaining just 1.2 percent and the average long-term fund rising only 2.6 percent.

The surprise of the year has been that long-term funds have done better than their short-term counterparts, although the Federal Reserve has been steadily raising interest rates for the past 15 months, from a 1 percent fed funds rate to the current 3.5 percent.

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Typically, long bonds are more sensitive to such increases, but they haven’t suffered as expected.

This has contributed to a challenging environment for bond managers, said Mark Kiesel, a senior member of PIMCO’s investment strategy and portfolio management group.

“This was totally unexpected and it has fascinated people, including us. Nobody could have predicted this,” Kiesel said. “It’s made for a challenging market in terms of predicting yields.”

Of course, Kiesel notes, interest rates aren’t the only thing bond managers monitor. There’s also duration, their position on the yield curve and the quality of issues they hold.

They watch volatility and can choose which sectors to invest in, from Treasuries, municipals and mortgages to corporate issues, TIPs, international and emerging markets and high yield. Finally, there’s currency; will the manager be long or short the dollar?

So, for skilled managers, there have been opportunities.

When the consensus was to avoid long bonds, some took a chance and held onto them, and were rewarded. For others, the credit downgrades of Ford and General Motors presented a buying opportunity. The automakers’ bonds dropped dramatically following their initial downgrades in April, but they rebounded over the following months. Managers who got in at the right time were able to book gains.