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Bond Funds That Withstood Recessions: Key Lessons for Investors

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Lessons from Bond Funds That Withstood Recessions

Investors seeking to protect their portfolios during economic downturns can learn valuable lessons from bond funds that demonstrated resilience in previous recessions. While the current market may seem favorable with attractive yields and a rally in stocks, it is important to prepare for potential downturns.

Thriving in Previous Recessions

During the Great Recession, a handful of bond funds stood out with impressive performances. The PGIM Core Bond Fund (TAIBX), the Calvert Core Bond Fund (CLDAX), and Pimco's Total Return II Fund (PMBIX) all generated returns exceeding 8% from December 2007 to June 2009. Similarly, during the Covid-19 recession, the Carillon Reams Core Bond Fund (SCCIX), the Johnson Institutional Core Bond Fund (JIBFX), and American Funds' Bond Fund of America (ABNDX) delivered total returns of over 4%.

Key Characteristics for Resilience

According to Paul Olmsted, a senior manager research analyst at Morningstar, bond funds that are more sensitive to interest rates tend to fare better during downturns. Longer duration bonds, which have greater price sensitivity to interest rate fluctuations, often perform well when yields fall due to lower inflation expectations. TAIBX, CLDAX, and PMBIX, with durations of approximately six years, exemplify this characteristic. However, it is important to note that adding duration is not a foolproof strategy. For instance, the iShares 20 Plus Year Treasury Bond ETF (TLT) has a duration of around 16 years, yet year-to-date total returns are -10%. This highlights the need for a balanced approach.

Attributes of Core Bond Funds

Core bond funds possess a combination of features that make them well-suited for downturns. Their allocations cover the entire yield curve, avoiding overexposure to short-term or long-term bonds. This diversification helps mitigate reinvestment risk and sharp price fluctuations. Core bond funds typically invest in a range of assets, including Treasurys, mortgage-backed securities, asset-backed securities, and corporate bonds.

Avoiding Risky Investments

Investors should be cautious about chasing higher yields in riskier corners of the fixed income market, such as high-yield bond funds. While these funds offer attractive yields exceeding 6%, they also carry default risk and have lower correlations to safer assets like Treasurys and highly rated corporate bonds. As recession fears loom, it is important to focus on long-term goals and recognize the role that core bond funds play in providing stability and income. Despite relatively flat year-to-date returns, core bond funds remain a crucial component of a well-diversified portfolio. In conclusion, investors can learn valuable lessons from bond funds that withstood previous recessions. By considering interest rate sensitivity, diversification, and long-term goals, investors can better protect their portfolios during economic downturns.

Implications of Recession-Resilient Bond Funds for New Businesses

The resilience of certain bond funds during previous recessions provides crucial insights for new businesses. As startups navigate the complex financial landscape, lessons from these bond funds could guide their financial strategies and risk management.

Learning from Past Recessions

The impressive performances of bond funds like the PGIM Core Bond Fund (TAIBX), the Calvert Core Bond Fund (CLDAX), and Pimco's Total Return II Fund (PMBIX) during the Great Recession, and others during the Covid-19 recession, illustrate the potential of well-managed funds to weather economic downturns. For new businesses, this underscores the importance of robust financial planning and risk management strategies.

Strategies for Resilience

Paul Olmsted's analysis highlights the role of interest rate sensitivity in bond fund resilience. New businesses can apply this insight by considering interest rate sensitivity when making investment decisions or structuring debt. However, the example of the iShares 20 Plus Year Treasury Bond ETF (TLT) serves as a reminder that a balanced approach is essential.

Core Bond Funds: A Model for Diversification

The attributes of core bond funds, such as diversified allocations and a mix of assets, can inform new businesses' investment strategies. By diversifying their financial portfolios, startups can mitigate risks and enhance stability.

Navigating Risky Investments

The cautionary note on high-yield bond funds is particularly relevant for new businesses, which might be tempted by high returns but overlook associated risks. Startups should be mindful of default risk and correlations to safer assets in their investment decisions. In essence, the resilience of certain bond funds in previous recessions offers valuable lessons for new businesses. By adopting a balanced and diversified approach to financial management, startups can enhance their resilience and long-term stability.
Story First Published at: https://www.cnbc.com/2023/11/07/these-bond-funds-withstood-the-2008-and-2020-recessions-what-investors-can-learn.html
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