Bond fund managers who opposed a market consensus earlier this year that yields and inflation were moving sharply higher have been rewarded with extraordinary performances during the market turnaround of recent weeks.
Top executives, including Scott Minerd of Guggenheim Partners and Stephen Liberatore of Nuveen, are high in the industry rankings after U.S. Treasury yields fell to 1.25 percent this week, from a high of more than 1. 7 percent at the end of March.
Markets have concluded that the global economic recovery will soon slow and that the US Federal Reserve is unlikely to lose control of inflation.
“In the end, the market was too far ahead of the recovery,” said Liberatore, lead portfolio manager for Nuveen’s fixed income strategies, whose bond-managed core securities have outperformed all of their competitors since late March.
“We are more likely to go below 1 percent” [on the 10-year] than we should be substantially above 1.5 or 1.75 percent,” he said.
Two Guggenheim funds managed by Minerd and his team are also among the five best-performing intermediate bond funds since the end of the first quarter, with total returns of more than 4 percent, according to Morningstar.
In early March, with the 10-year bond still four weeks from its peak and its funds taking a beating, Minerd, global chief investment officer at Guggenheim, argued for contrarianism.
“The foregone conclusion today is that long-term interest rates are continuously higher,” he said at the time. “History tells us otherwise.”
Minerd argued that massive stimulus from governments and central banks would eventually result in accumulated savings, which would eventually find a home in the financial markets and lower government bond yields.
Its funds are now positive for the year, ahead of the Bloomberg Barclays US Aggregate index, the leading fixed income benchmark for investors. The aggregate has recovered 2.6 percent from early April, for a total return of minus 0.8 percent in 2021 so far.
A steady decline in yields since the start of the second quarter accelerated sharply this month, which market participants attributed to a liquidation of short positions by hedge funds and other momentum-focused traders whose bets had turned against them.
PGIM’s total return bond fund, managed by Robert Tipp, recovered 4.15 percent after a difficult first quarter and is now ahead of the benchmark as he remained steadfast in his view that long-term government bonds were declining.
“The market was counting on a moderate contingency at the Fed,” said Tipp, who would keep the economy spinning, pushing inflation up and the value of long-term bonds falling. That story faltered last month, he said, when Fed officials opened the door to raising interest rates in 2023, earlier than previously expected.
Mark Lindbloom, who manages the Western Asset Core Plus Bond Fund, agreed. “We don’t believe the Fed will sacrifice its credibility today or in the future” by taming inflation in the 1980s, he said.