Advertisement
Kip 25

Pimco Income Has a Playbook for Rising Interest Rates

Pimco's managers have tremendous latitude to invest wherever the yield is.

If interest rates rise over the next year, many bond funds could face tall hurdles. Steeper rates would push down the prices of their bonds. And if those IOUs aren’t paying out enough interest income, investors in the funds could wind up losing money. However, Pimco Income (PONDX) should be a good bet if rates continue to rise modestly, thanks to its robust yield of 3.5% (above the market average of 2.6%) and low sensitivity to rates.

Unlike bond funds that target one part of the market, Income, a member of the Kiplinger 25 can invest in just about anything the managers want. The fund recently held 9% of its assets in high-yield “junk” bonds, for instance, and 18% in emerging-markets debt. To keep the portfolio stable, Income holds large amounts of short-term Treasuries and mortgage-backed securities. Man­agers Alfred Murata and Dan Ivascyn (Pimco’s chief investment officer) also use complex hedging techniques to make side bets on the direction of interest rates, both in the U.S. and abroad.

Advertisement - Article continues below

Those side bets are the key to Income’s relatively low sensitivity to rates. The fund’s net asset value would likely fall by about two percentage points if market rates were to increase by one point. That would sting. But it wouldn’t be nearly as bad as the losses incurred by longer-term bond funds (Income’s average maturity is about six years) or those that don’t hedge against rates.

Advertisement
Advertisement - Article continues below

Granted, this is a gigantic fund with a lot of moving parts. Income’s assets top $99 billion, making it the largest actively managed bond fund in the U.S. Managing so much money successfully takes a deft touch. If a few of Income’s big bets go awry, the fund could take some hits.

Another issue for investors to consider: Much of the bond market now looks fully valued, says Murata. With few bargains to be found, he says, “there’s little margin for error.” Rather than go out on a limb, Murata and Ivascyn are investing more defensively while trying to maintain the fund’s yield. The managers have bought more short-term high-yield bonds, for instance, which should hold up well if rates increase. In this environment, says Murata, “we think it makes sense to be more cautious.”

Advertisement

Most Popular

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)
tax deadline

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Between due dates for paying estimated taxes, IRA or HSA contributions, and other deadlines, there's more to do by July 15 than just filing your feder…
July 14, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020
Tax Day 2020: When's the Last Day to File Taxes?
tax deadline

Tax Day 2020: When's the Last Day to File Taxes?

Thanks to the coronavirus pandemic, the 2020 tax deadline was pushed back to give taxpayers (and tax preparers) more time to file returns.
July 14, 2020

Recommended

91 Top Dividend Stocks From Around the World
stocks

91 Top Dividend Stocks From Around the World

These 91 Dividend Aristocrats, from the U.S., Canada and Europe, are among the world's top dividend stocks for payout longevity and safety.
July 13, 2020
3 Municipal Bond Funds for Rich, Tax-Friendly Yields
Investing for Income

3 Municipal Bond Funds for Rich, Tax-Friendly Yields

Municipal bond funds allow you to enjoy the benefits of tax-exempt income. By investing in CEFs, you can sweeten the pot even further.
July 13, 2020
2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 10, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020