Historically, intermediate-term bonds receive a large allocations from investors making a core part of their holdings. However, Lord Abbett says that there is a broader opportunity set in core plus bonds with enhanced prospects for dislocated valuations in high-quality credit sectors.

“Over the years, the duration of the benchmark (Bloomberg Aggregate Index) extended from around 4-5 years to over 6.7 years, while yields declined from near 5% to a low of around 1%,” writes Stephen Hillebrecht, Co-head of Product Marketing, Lord Abbett, while talking about how intermediate-term bonds provide a low level of yields to compensate for the risk exposure.

The investment management firm says that based on the data available, for an index yield of only 1.7%, a minor move in rates may wipe off a year’s worth of income and that’s why it is necessary to focus on short-duration strategies.

“Investors are well-aware of what happened in 2022, as it was the worst year on record for the Bloomberg Aggregate Bond Index. And that pain was felt across many different sectors,” adds Hillebrecht. However, yields have substantially moved higher in several markets. This provides investors with a good starting point for forward returns and a better cushion to absorb any further rate hikes.

“Credit spreads, though, have been extremely volatile over the past year, posing a challenge for the market as it tries to assess the short-term consequences of the Fed’s rate hikes on economic growth. That volatility has been the challenge for this market,” writes Kewjin Yuoh, Partner & Portfolio Manager, Lord Abbett.

However, the macro uncertainty-driven volatility in the market creates an opportunity for active sector rotation and Lord Abbett is maintaining its up-in-quality bias for investors.

“Looking ahead, we think certain credit-risk sectors may benefit from a decline in volatility, and those asset classes that have illiquidity premiums or are directly exposed to interest-rate volatility should also do well as volatility declines in 2023,” as per Yuoh.

The investment manager advises investors to consider the core plus bonds strategy through short-duration bonds, which offer attractive risk-adjusted returns in short duration.

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