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.

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.

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.”

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 12 Best Tech Stocks to Buy for 2022
tech stocks

The 12 Best Tech Stocks to Buy for 2022

The best tech-sector picks for the year to come include plays on some of the most exciting emergent technologies, as well as several old-guard mega-ca…
January 3, 2022
How to Know When You Can Retire
retirement

How to Know When You Can Retire

You’ve scrimped and saved, but are you really ready to retire? Here are some helpful calculations that could help you decide whether you can actually …
January 5, 2022

Recommended

Is the Stock Market Closed on MLK Day?
Markets

Is the Stock Market Closed on MLK Day?

Both the stock markets and bond markets will have Monday off as the nation honors civil rights leader Martin Luther King Jr.
January 15, 2022
Stock Market Holidays in 2022
Markets

Stock Market Holidays in 2022

Is the stock market open today? Take a look at which days the NYSE, Nasdaq and bond markets take off in 2022.
January 14, 2022
Kiplinger's Weekly Earnings Calendar
stocks

Kiplinger's Weekly Earnings Calendar

Check out our earnings calendar for the upcoming week, as well as our previews of the more noteworthy reports.
January 14, 2022
The 10 Best Closed-End Funds (CEFs) for 2022
CEFs

The 10 Best Closed-End Funds (CEFs) for 2022

These high-yielding CEFs won't just significantly boost your portfolio income. They'll also allow you to buy their underlying stocks and bonds at a di…
January 12, 2022