How the World's Biggest Bond Managers Are Investing in a Tumultuous Market

The world’s biggest bond managers are navigating a turbulent market by reducing their appetite for broad macro bets and focusing instead on higher-quality investments, according to a Reuters survey of eight major U.S. bond managers overseeing nearly $700 billion collectively.

The shift comes as Treasury yields have risen amid concerns over inflation and government deficits, while the corporate bond market faces valuation risks and a growing wave of debt issued to finance artificial intelligence infrastructure. The Bloomberg Aggregate Index is down about 1% this year, putting it on track for its weakest performance since 2022.

Arvind Narayan of Vanguard said investors should be selective and conservative. He favors shorter-dated, high-quality assets, including investment-grade corporate bonds, asset-backed securities and agency mortgage-backed securities. Vanguard is also negotiating directly with issuers as AI-related borrowing becomes a major feature of the credit market.

Dan Ivascyn, chief investment officer at PIMCO, said he is finding opportunities in asset-backed and residential mortgage-backed securities while viewing corporate bonds as relatively expensive. He also sees potential value in longer-dated U.S. Treasury bonds. PIMCO manages the $231.8 billion Pimco Income Fund, the largest actively managed bond fund.

Other managers are similarly emphasizing security selection. PGIM’s Greg Peters is increasing exposure to residential mortgage-backed securities, while Fidelity’s Julian Potenza is favoring short-term, high-quality spread assets and maintaining credit risk toward the lower end of its historical range.

At Capital Group, Pramod Atluri sees opportunities in longer-term Treasuries after the rise in yields. He also sees selected AI-related corporate debt as potentially attractive when the credit quality justifies the additional risk.

BlackRock’s Russell Brownback said higher yields provide greater income potential despite day-to-day volatility. His team is looking closely at mortgages and securitized credit while monitoring lower-quality high-yield and subprime asset-backed securities for signs of stress.

The benchmark 10-year Treasury yield has remained around 5%, giving investors a higher starting level of income than during the period preceding the 2022 bond selloff. Several managers said those higher starting yields could help cushion portfolios if bond prices decline further.

Overall, the message from major bond managers is one of caution rather than aggressive positioning. With geopolitical tensions, fiscal policy, inflation and the rapid expansion of AI investment creating unusually wide potential outcomes, managers are looking for smaller opportunities where the expected return adequately compensates for the risks.