In the second quarter of 2023, the median return in Morningstar's domestic fixed-income universe was -0.09%, while the Bloomberg U.S. Aggregate Bond index fell 0.84%.
According to Morningstar Inc.'s separate account/collective investment trust database, the list of top-performing managers for the year ended June 30 was dominated by bank loans (accounting for six of the top 10), while high-yield bonds accounted for three spots and a muni national long bonds strategy took the remaining spot.
Thomas Murphy, Chicago-based manager research analyst at Morningstar Research Services LLC, a subsidiary of Morningstar, said that while 2022 was a "historically bad year for fixed income where nothing seemed to work," the bond markets have somewhat recovered and normalized this year on the back of a relatively healthy and stable economy and a climate of declining inflation.
"These factors have provided tailwinds for both stocks and bonds," he noted in an interview.
However, while fixed-income securities have generally delivered positive returns in the first half of 2023, it still remains a "bifurcated market" with credit-sensitive subsectors like bank loans (which are floating-rate instruments) and high-yield bonds outperforming other segments of the fixed-income universe.
In contrast, rate-sensitive bonds are "still feeling the pain" as interest rates have continued to climb, Mr. Murphy noted.
However, looking out over the remainder of the year, Mr. Murphy noted that high-quality bonds may offer an appealing opportunity for investors as inflation eases and the Fed soon ends its tightening campaign.
Matthew Routh, Dallas-based managing director, portfolio manager and analyst at Barrow Hanley Global Investors, said the fixed-income market's 2023 rebound has been driven by consistent inflows into investment-grade securities as investors are increasingly attracted to the sector's higher yields and improved return potential. "Fully funded pensions are also looking to hedge equity market risk amid the relatively rich valuations found in the U.S. stock market," he said in an email. "In this sense, fixed income is once again able to fulfill its traditional role within clients' overall allocations. Today's higher yields leave more room for yields to decline in a risk-off environment and should provide positive total returns to offset declines in clients' equity portfolios."
Barrow Hanley's bank loan strategy was ranked No. 10 for the year ended June 30 with a gross return of 11.44%.
Mr. Routh has a positive outlook for the bond market for the remainder of this year.
"The Fed is almost certainly near the end of its rate-hiking cycle, so there is a low probability that bond yields will climb high enough to wipe out today's higher level of coupon income," he said.
"Fundamentals, particularly the health of balance sheets, have remained strong for the corporate bond market, even amid a slowing growth environment. If the U.S. does enter a recession before the end of the year, then a risk-off flight to U.S. Treasuries has the potential to generate positive total returns larger than any losses from spread widening in credit sectors."
Barrow Hanley had $46.1 billion in assets under management as of June 30, including $5.7 billion in fixed income AUM.
George K. Goudelias, Park Ridge, N.J.-based managing director, senior portfolio manager, and head of leveraged finance of Seix Investment Advisors, that fixed income is in good shape as the market has begun to anticipate a more stable Fed over the next 12 months.
"In addition, the much-feared recession has also begun to fade into the rearview mirror for 2023 as the combination of government stimulus, strong consumer demand for services, and corporations reacting swiftly to right-size their operations has led to decent economic growth and corporate earnings," he said in an email.
Seix has $13.5 billion in AUM, all of which is in fixed income.
Anders Persson, Charlotte, N.C.-based chief investment officer for global fixed income at Nuveen, said fixed-income investors should consider adding duration at current levels.
"Longer-duration assets have historically outperformed when the Fed ends its tightening cycles," Mr. Persson said in an email. "With the Fed's hiking cycle nearly complete and recession expectations largely delayed to 2024, we continue to favor spread sectors and credit risk in asset allocation."
He added that credit spreads are likely to widen in the coming months, which may present more attractive entry points for risk taking.
"That said, we currently see opportunities in the preferred market and in BB-rated high yield and senior loans, but do not see much further upside for long-end yields," he said.
Nuveen has $1.1 trillion in AUM, including $434 billion in fixed income.
