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

What Biden Will Do: 24 Policy Plays to Expect From the Next Administration
Politics

What Biden Will Do: 24 Policy Plays to Expect From the Next Administration

The Kiplinger Letter forecasts President-Elect Joe Biden’s biggest priorities -- and the likelihood of progress on them.
November 19, 2020
The 13 Best Healthcare Stocks to Buy for 2021
Kiplinger's Investing Outlook

The 13 Best Healthcare Stocks to Buy for 2021

Most of the best healthcare stocks for 2021 will have some sort of ties to COVID, whether it's producing a vaccine or cure, or benefiting from the vir…
November 20, 2020
16 Worst Gifts to Impulse Buy for the Holidays
shopping

16 Worst Gifts to Impulse Buy for the Holidays

Don't let those holiday sale promotions persuade you into buying something now that will be much cheaper later.
November 18, 2020

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
The 7 Best Bond Funds for Retirement Savers in 2021
bonds

The 7 Best Bond Funds for Retirement Savers in 2021

Fixed-income investors have a rocky hill to climb in 2021. These are seven of the best bond funds to buy for this tall task.
December 2, 2020
The Best Vanguard Funds for 401(k) Retirement Savers
mutual funds

The Best Vanguard Funds for 401(k) Retirement Savers

Vanguard funds account for a third of the 100 most popular 401(k) retirement products. We rank Vanguard's best actively managed funds, including its t…
November 27, 2020
Is the Stock Market Open on Thanksgiving and Black Friday 2020?
Markets

Is the Stock Market Open on Thanksgiving and Black Friday 2020?

The stock market will take a pause on Thanksgiving, but investors will need to pay attention for a few hours on Black Friday.
November 25, 2020