What’s behind the surge in demand for bonds? Is now the time to invest? And if so, what are the options for bonds? Coming up, we have the answers.

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From Thrivent Asset Management, welcome to Advisor’s Market360^™, a podcast for you, the driven financial advisor.

Traditionally, bonds have occupied a sleepy corner of the investment world. But over the past couple of years, bonds have been getting more exciting and demand across the entire fixed income market has been extremely strong. Why? Simply put, it’s the current yields—which are, right now, at historically high levels. In fact, the yield across investment-grade corporates or high-yield corporates are at an almost 15-year high. Not surprisingly, that has resulted in more investments into these asset classes. And expectations are that demand will continue to be strong—especially with the U.S. Federal Reserve, or Fed, in a rate cutting cycle.

The reason fixed income is attractive in the early stages of a Fed rate cutting cycle is that, typically, fixed income yields—whether it’s governments or corporates—may decline by anywhere from 2.5–3%. That’s what has happened in the past three rate cutting cycles. When rates are declining, the price of the bonds are also increasing, resulting in capital appreciation that makes fixed income more attractive.

Before we continue our exploration of the current bond market, we would like to introduce our subject matter expert, Kent White, Thrivent’s Head of Fixed Income. He also co-manages Thrivent Income Fund with Senior Portfolio Manager Cortney Swensen. While today’s episode will focus on Thrivent Income Fund, investors can learn a lot about the bond market in general, so let's get into it…

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As with any mutual fund, Thrivent Income Fund has clearly defined objectives. We will let White explain.

(White) “The primary objective of Thrivent Income Fund is a higher level of income, and we seek to do that through investing primarily in investment-grade corporate bonds. A secondary objective is the preservation of capital. And how we do that is, generally, in certain environments, we might want to shift into a higher-quality positioning in the Income Fund. Whether that’s through higher-quality corporate bonds or asset allocation decisions, like shifting more of our portfolio into U.S. government bonds or other high-quality investments.”

While the Fund’s two objectives are probably what you would expect from a bond fund, Thrivent Income Fund does have some important differences from its peer group. Here’s White:

(White) “I think what makes Thrivent Income Fund a little bit different from its peer group is that we’ve got a flexible approach to how we invest through the cycle. We’re very cognizant of where valuations are across different asset classes. Thrivent has a very deep and broad team of portfolio managers and research analysts across different asset classes, whether it’s high yield, emerging markets, or securitized assets. And we are very collaborative, and we have a lot of conversations about where valuations are at. And depending on how we want to be positioned, our risk profile and those valuation inputs, we will move in and out of some of those different asset classes over time.”

We wanted to dig a little deeper on the Fund’s corporate bond holdings:

(White) “Within our corporate bond holdings, we try to stay pretty diverse. It’s not a very concentrated portfolio. I know that there are some funds that run very concentrated, but we try to—especially through some cycles—we try to be a little bit more diverse in our corporate bond holdings.”

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Typically, the role of a bond fund within an investor’s portfolio is to be the conservative counterweight to risk assets, namely equity. As such, for a bond fund, preservation of capital is very important, but of course, so too is capital appreciation. We will let White explain how the fund makes moves to achieve this balancing act:

(White) “As I mentioned earlier, one of the primary objectives is preservation of capital. So, there are other asset classes that we can move to accomplish that, whether it’s moving into U.S. Treasuries, mortgage-backed securities or other less risky asset classes. And, at the same time, a secondary objective of the Fund is capital appreciation. So, it’s not all about just when things are risk-off. We also are opportunistic, and we can move into things like high yield or emerging market debt when we think those valuations are attractive. So, there’s a lot of flexibility in the Fund to move in and out of asset classes based on where our team feels there’s value.”

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Many of our listeners are interested in learning how fund managers select their investments. We asked White how he and his team choose bonds for Thrivent Income Fund.

(White) “We have both top-down and a bottom-up strategy for creating a portfolio. My primary role on the Fund is to have more of a top-down view: where do we see the economy going? Where are we at in the credit cycle? And how will that influence how we’re positioned in corporate bonds? And then, we have a team including myself and Cortney Swensen who manage all the corporates inside the Fund, and we really rely on our head of research, Tracy Pamperl, and our research team to provide us with the bottom-up input. And they will provide us with recommendations for which industries we want to be overweight or underweight, and within those industries which companies they would like us to be invested in. So, it’s a very collaborative process.”

In fact, White and his team will gather information from a variety of sources…

(White) “We work not only with our research team, but also our trading desk. We get a lot of market color from our traders, as well. But it really is a very collaborative process where it’s a team that puts this portfolio together.”

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In an environment where bond rates are high, managing risk can become more challenging. We asked White how he and his team mange that risk…

(White) “Depending on our view on the economy and the credit cycle, we also adjust our risk profile within the Fund. Credit spreads are the main metric that we look at. A credit spread is the incremental yield that you get over a risk-free government bond. So, in some environments, spreads are very tight, and we don't feel like we're getting compensated for risk, and we'll try to go up in quality in those types of environments. Other times, credit spreads look very attractive, and we’ll go down to lower quality credits, dip into high yield or emerging markets, and that's one way that we manage risk within the profile. There are other types of risk as well, including interest rate risk. But credit risk is the primary risk that we’re focused on in the Income Fund.”

We asked White to go a little deeper on interest rate risk:

(White) “In terms of interest rate risk, we are very cognizant of how we’re positioned versus our peer group, whether we’re long duration or short duration and where we’re positioned on the curve in an environment like this in which we anticipate the Fed will begin to cut rates. We want to be positioned at different points of the curve in that type of environment. We also manage interest rate risk in the portfolio, and we accomplish that primarily through our Treasury and futures holdings and adjust where we want to be on the curve depending on the interest rate environment that we are foreseeing.”

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To wrap up this episode, we wanted to learn how Thrivent Income Fund has changed since its launch in 1997.

(White) “The way that we’ve managed Thrivent Income Fund really hasn’t changed too much over the years. We still have this really great process that has not changed at all. But we do have access to a lot more information about what our peer group looks like and other quantitative tools. We’ve got a great quant team here that can get us a lot of information like that. I’d say that, since I’ve started managing the Fund in 2017, we’ve probably increased our exposure to corporate bonds a little bit more than it had been in the past. But outside of that, it’s the same philosophy, same process.”

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We hope you enjoyed this look into Thrivent Income Fund. Once again, we would like to thank Kent White for his insights. What did you think of this episode? Email us at podcast@thriventfunds.com with your feedback or questions for our experts. Want more episodes of Advisors Market360^™ and other market and investing insights? Visit us at thriventfunds.com, where you can learn how we can partner with you, the driven financial advisor. Bye for now.

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All information and representations herein are as of 8/27/2024, unless otherwise noted.

Past performance is not necessarily indicative of future results.

Investing involves risks, including the possible loss of principal. The prospectus and summary prospectus contain more complete information on the investment objectives, risks, charges and expenses of the fund, and other information, which investors should read and consider carefully before investing. Prospectuses and summary prospectuses are available at thriventfunds.com or by calling 800-847-4836.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Debt securities are subject to risks such as declining prices during periods of rising interest rates and credit risk, or the risk that an issuer may not pay its debt. U.S. government securities may not be fully guaranteed by the U.S government and issues may not have the funds to meet their payment obligations. The value of U.S. government securities may be affected by changes in credit ratings, which may be negatively impacted by rising national debt. The value of mortgage-related and other asset-backed securities will be influenced by the factors affecting the housing market and the assets underlying such securities. High yield securities are subject to increased credit risk as well as liquidity risk. These and other risks are described in the prospectus.

Thrivent Distributors, LLC, a registered broker-dealer and member FINRA, is the distributor for Thrivent Mutual Funds. Asset management services are provided by Thrivent Asset Management, LLC, an SEC-registered investment adviser. Thrivent Distributors, LLC, and Thrivent Asset Management, LLC are subsidiaries of Thrivent, the marketing name for Thrivent Financial for Lutherans.