US Market: Bond fund managers turn cautious as yields, AI debt raise risks

The turbulent bond market has left some of the biggest US fixed-income fund managers favouring caution, with investors focusing on higher-quality assets and avoiding large macroeconomic bets amid rising yields, inflation concerns and a surge in AI-related debt issuance, according to a Reuters report.

Reuters spoke to eight senior bond fund managers overseeing nearly $700 billion in assets. Their views point to a more selective approach to fixed-income investing as Treasury yields climb and corporate bond valuations remain stretched.

The Bloomberg US Aggregate Bond Index is down about 1% this year, putting it on track for its weakest annual performance since 2022. While many active managers have outperformed the benchmark, most remain in negative territory for the year.


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Treasury yields have risen amid concerns about inflation and fiscal deficits, while investors are also assessing the risks from the rapid expansion of AI-related borrowing, Reuters reported.

Arvind Narayan, co-head of investment-grade credit at Vanguard and a senior portfolio manager of the Vanguard Short-Term Investment Grade Fund, is favouring short-duration assets, which he sees as offering relatively attractive all-in yields.

Narayan is focusing on diversified exposure to investment-grade corporate bonds, asset-backed securities and agency mortgage-backed securities. He also views AI-related borrowing as a key issue for the credit market and said Vanguard is working directly with issuers on deal terms, according to Reuters.

Dan Ivascyn, chief investment officer at PIMCO and manager of the $231.8 billion PIMCO Income Fund, is also taking a selective approach. He sees opportunities in asset-backed and residential mortgage-backed securities, while considering corporate bonds richly valued, Reuters reported.

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Ivascyn is also finding opportunities in longer-dated US Treasuries. He remains focused on the implications of geopolitical conflicts, fiscal policy and the economic impact of the AI investment boom, factors that have increased the range of potential outcomes for bond markets, according to Reuters.

Greg Peters, co-chief investment officer at PGIM Credit, is emphasising security selection and disciplined risk management. He is increasing exposure to residential mortgage-backed securities but remains cautious about AI-related debt, arguing that higher yields alone do not necessarily compensate investors for the associated risks, Reuters reported.

Julian Potenza, a portfolio manager at Fidelity Investments, is favouring short-term, high-quality spread assets while keeping credit risk toward the lower end of its historical range. His approach also makes him selective about debt issued by large AI companies and hyperscalers, according to Reuters.

At Capital Group, portfolio manager Pramod Atluri is taking a somewhat different approach by finding value in longer-dated Treasuries after the rise in yields. He is also looking selectively at AI-related corporate debt where pricing offers attractive compensation relative to underlying credit quality, Reuters reported.

Ed Fitzpatrick, portfolio manager and head of US rates strategy at JPMorgan Asset Management, sees fewer opportunities than in previous periods. He has increased exposure to investment-grade and securitised credit but remains cautious about AI-linked corporate debt, particularly as large issuers continue to bring substantial volumes of bonds to market, according to Reuters.

Russell Brownback, deputy chief investment officer of global fixed income at BlackRock, believes higher yields have made the bond market more resilient despite elevated price volatility. He favours carefully selected mortgages and securitised credit while monitoring lower-quality high-yield bonds and subprime asset-backed securities for signs of stress, Reuters reported.

Warren Pierson, co-chief investment officer at Baird Asset Management, is also pursuing a conservative strategy focused on bottom-up security selection. His team favours shorter-dated corporate bonds, selected non-agency mortgages and highly rated securitised assets, while maintaining an underweight position in longer-term Treasuries, according to Reuters.

The cautious stance comes as higher yields provide investors with more income than was available during the low-rate era. The increase in yields can cushion portfolios against price declines, making the starting yield an important component of expected total returns.

The benchmark 10-year Treasury yield has approached 5%, creating interest among some managers in longer-duration government debt. At the same time, long-term US borrowing costs have continued to climb, reinforcing concerns about inflation, fiscal deficits and the future path of interest rates.

The bond market's focus on selectivity is also being reinforced by the growing supply of AI-related debt. Several fund managers surveyed by Reuters said they were being particularly selective about such bonds as companies ramp up borrowing to finance data centres, chips and other AI infrastructure.

For bond managers, the result is a market where income opportunities have improved but the range of risks has also widened. Rather than relying on broad calls on interest rates or credit markets, several of the managers surveyed by Reuters are concentrating on individual securities, shorter maturities, higher-quality credit and areas where yields adequately compensate for risk.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)