Fed Hike Puts Bond Investors at a Crossroads

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Federal Reserve Chair Kevin Warsh said the central bank would take its cues from the bond market. One bond manager says that plan backfired quickly.Key Takeaways: Fed officials face a choice between more hikes that could slow the economy and a pause that risks credibility. Rising government bond yields reflect global forces like stimulus, AI spending, and oil shocks rather than only U.S. deficits. Two Thornburg bond ETFs take different paths, with TPLS running longer duration and TMB shorter than their benchmarks. “I think he talked way too much and he said, ‘Hey, we’re going to take our cues from the bond market,’ and the bond market promptly punched him in the face,” Thornburg Investment Management head of fixed income Christian Hoffmann said during a recent webcast. Under Warsh, the Fed has delivered its first rate hike since 2023, according to Thornburg portfolio specialist Kevin Endo. Markets now expect three to four more after spending the first half of the year debating cuts, Hoffmann added. He also warned that the Fed is nearing “a fork in the road where one path leads to a policy mistake.” Too many hikes could hurt the economy, he said, while stopping early could reopen doubts about its credibility. That uncertainty hits bond investors who are already nursing losses. Core bonds lost 2.5% over the past five years, Endo said, leaving advisors with a blunt client question: why own them? Hoffmann’s answer starts with yields. Inflation-adjusted yields now top 3%, which he said investors haven’t seen in over 20 years. Portfolio manager Ali Hassan added that rising yields aren’t just a story about U.S. deficits. Developed-market yields have climbed together, he said, driven by COVID-era stimulus, the AI boom, and oil and food price shocks. Even so, Hassan said that deep markets and positive demographics still give the U.S. an edge over Europe, Japan, and China.How Thornburg Is Approaching Bond RiskCredit spreads are near their tightest in 20 years, according to Hoffmann, leaving little extra pay for corporate bond risk. So his team is taking on some duration risk while keeping credit risk moderate. See more: Why Tight Credit Spreads Raise Risk for Bond Investors He also cited convexity, meaning a rate drop should lift bond prices more than an equal rise would hurt them. Hoffmann called it “the opposite of the house always wins.” That tilt shows up in the Thornburg Core Plus Bond ETF (TPLS ), which Hoffmann co-manages with Lon Erickson. Its duration was 6.3 years as of August 31, versus 5.8 years for the Bloomberg U.S. Aggregate Index, according to Thornburg. The Thornburg Multi Sector Bond ETF (TMB ), which adds Hassan as a manager, moves more widely across sectors and credit qualities. Its duration was shorter, at 4.2 years versus 5.6 years for the Bloomberg U.S. Universal Index, according to Thornburg. TMB carried a 30-day SEC yield of 4.9% as of September 30, while TPLS yielded 4.8%, according to Thornburg. TMB also held $264.8 million in assets as of October 9, compared with $19.2 million for TPLS. Hoffmann noted that the 2022 reset behind today’s yields also left damage. Some bonds issued before 2022, when real yields were negative, now trade near 50 cents on the dollar. Getting them back to par would take “a miraculous turn of events,” he said. For more news, information, and analysis, visit our Portfolio Strategies Content Hub.

Fed Hike Puts Bond Investors at a Crossroads

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