A quartet of bond managers ensconced in a glistening tower in Newark, New Jersey, say historically low long-term Treasury yields are here to stay. And they’ve got a growing pile of money backing that view.
For the crew at PGIM Fixed Income, there’s no bond bear market in sight — though they say they’re getting defensive in the face of rising volatility. As if the firm’s $709 billion of assets wasn’t enough to get the market’s attention, Morningstar Inc. crowned the group its 2017 fixed-income manager of the year for shepherding the Prudential Total Return Bond Fund. It gained 6.6% last year, beating 87% of peers, data compiled by Bloomberg show.
The ‘stay calm and carry on’ view on rates, which they’re applying across the firm’s assets, is far from consensus. Many investors say there’s nowhere to go but up for Treasury yields, with central banks unwinding post-crisis monetary stimulus and America’s fiscal picture deteriorating. So far this year, the bears are winning out: U.S. 10-year yields are close to a four-year high just below 2.9%, and the PGIM fund is suffering steeper losses than most rivals.
The group’s chief investment strategist and “macro guy,” Robert Tipp, who has an aura of calm that may come from his stress-relieving practice of tai chi, rattled off the global forces that he expects to cap yields.
“We look at the world with the trends that are going on, with aging, and rising debt levels, leading to an environment that has pretty low and stable inflation and pretty moderate growth,” he said in an interview this week at the Prudential Tower, less than 15 miles (24 kilometers) west of Lower Manhattan.
The bond bulls’ case has gotten even more difficult to make in 2018. The U.S. is ramping up issuance to cover widening fiscal deficits, just as the Federal Reserve is trimming its balance sheet and signaling further rate hikes ahead. And then Wednesday’s U.S. consumer price report suggested inflation is heating up.
For Tipp, the data still fit into their macro view, which has 10-year rates topping out around 3%. The lower-for-longer camp has other followers, of course. But perhaps none wields as much money as PGIM Fixed Income, part of the investment-management arm of Prudential Financial Inc., which as a whole oversees $1.39 trillion.
Tipp runs the Total Return fund along with Michael Collins, Gregory Peters and Rich Piccirillo. The managers have a century of market experience between them and have guided the fund through a period of striking growth. Assets have climbed to $31 billion, from about $3 billion in 2013. It added $9.5 billion last year, behind only the Pimco Income Fund among active bond funds, according to Morningstar.
They benefited in 2015 from investors fleeing Pacific Investment Management Co.’s Total Return Fund after Bill Gross departed the prior year, and then from an effort to be included in companies’ 401(k) retirement plans and mutual-fund advisers’ recommended offerings. The PGIM Total Return fund’s performance has bolstered their case. It’s averaged almost a 3% annual gain over the past five years, better than 82% of peers, Bloomberg data show.
But their bullish view on interest rates, which paid off in 2017 as yields failed to move higher for much of the year, is backfiring in 2018. Even though the team says their broad macro view accounts for just 10 to 15% of performance, the fund is down 2.3% this year, trailing around 90% of peers.
‘February Is Worse’
As bad as January was, “February is worse,” said Peters, a senior portfolio manager. He’s the newest team member, joining four years ago from Morgan Stanley, where he was chief global cross-asset strategist. The challenge is building because, in addition to Treasury yields grinding higher, credit spreads have also started to widen.