Bond Market Turmoil Spurs Strategy Shift for Fund Managers

Bond market volatility prompts shift to active management amid central bank policy shifts and mixed economic signals.

By Max Weldon

5/16, 06:16 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF

Key Takeaway

  • Bond market volatility forces fund managers to shift from buy-and-hold to active trading strategies, adapting to rapid price swings.
  • Traditional fixed-income investors now face higher risks and must frequently adjust positions, contrasting with past decades' practices.
  • Despite challenges, some see volatility as an opportunity for better entry points, though bonds lose their status as a stable investment anchor.

Embracing Volatility in Bonds

The bond market, traditionally a haven for buy-and-hold investors, has transformed into a volatile arena where even old-school bond investors are adapting to thrive. According to Gershon Distenfeld of AllianceBernstein, managing around $47 billion, volatility is now seen as an opportunity rather than a threat. This shift comes as bond volatility has outpaced other assets for two years, with long-term yields experiencing more significant swings than the daily average of the past decade. This week's mixed economic signals, with producer prices rising more than expected and consumer price inflation cooling, have kept the Federal Reserve's rate cut bets in play, further fueling market volatility.

Transition to Active Management

The necessity for more active management in the bond market is underscored by the performance disparity between passive and active strategies. While US Treasuries held in an index lost about 2% this year, quant funds focusing on fixed income saw a 5.3% increase, according to a Barclays index. This performance gap has led to a 49% increase in the turnover ratio of bond mutual funds for US Treasuries compared to two years ago, as reported by JPMorgan Chase & Co. research. Vincent Mortier of Amundi SA highlights the need for quicker adjustments in positioning along the yield curve, reflecting a broader trend towards active management in response to market conditions.

The Role of Central Bank Policy

Central bank policies have been a significant driver of increased volatility in the bond market. The retreat of central banks as major bond buyers has introduced more price-sensitive investors, demanding higher yields to absorb the supply glut. This environment has made bonds less of the safe haven they once were, according to David Kelly of J.P. Morgan Asset Management. The anticipation of central bank actions continues to influence market dynamics, as seen in the positioning for a bond rally following crucial inflation data, with traders targeting a US 10-year yield at 4.3%.

Street Views

  • Gershon Distenfeld, AllianceBernstein (Neutral on the bond market):

    "As an investor we have to deal with calming our clients down, but volatility can be our friend."

  • Tim Magnusson, Garda Capital Partners (Neutral on the fixed income market):

    "It’s more of a trader’s market now... It’s all been a bit of a transition that fixed income folks have had to endure and get used to."

  • Vincent Mortier, Amundi SA (Neutral on active management in bonds):

    "We have to be much more active in management, quicker to add, cut or modify positioning on the curve."

  • John Madziyire, Vanguard (Optimistic about opportunities from volatility for long-term investors):

    "Volatility is also an opportunity. If you are a long-term investor it gives you better entry levels to get in."

  • Kathryn Kaminski, AlphaSimplex Group (Cautious about bond risk for traditional investment strategies):

    "If you are taking a long term view, as many investors do, then you have a lot more risk than many expect with bonds."

  • David Kelly, J.P. Morgan Asset Management (Cautious regarding the current state of the bond market):

    "Bonds aren’t quite the safe anchor they used to be and the rise in volatility has portfolio implications... This isn’t your father’s bond market and you have to adjust appropriately."