Short-term bonds have momentum in today’s markets. Coming up, we tell you why.
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From Thrivent Asset Management, welcome to Advisor’s Market360™, a podcast for you, the driven financial advisor.
The bond market in 2024 continues to exhibit surprising dynamics, with yields on short-term bonds exceeding those of longer-term bonds. This inverted yield curve first appeared in October of 2022 and continues to persist. In mid-March, the Treasury yield curve set a new record for the longest period that the curve remained inverted. In fact, according to the Treasury Department, as of the end of first quarter 2024, 3-month Treasury bills yielded 5.46% and 2-year Treasury yields were 4.59%, while the yield on 10-year Treasury notes was even lower, at 4.20%. With this record-setting inversion in mind, the question is: how much of an opportunity is there for investors?
To answer that question and many others, we are pleased to have two Thrivent experts join us for this episode: Cortney Swensen, CFA, and J.P. Gagne. Both are Senior Portfolio Managers of Thrivent Limited Maturity Bond Fund. Swensen focuses on the corporate credit portion of the Fund, while Gagne focuses on securitized bonds backed by interest-bearing loans like auto loans, student loans and mortgages.
With the introductions complete, let’s get into it…
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The current inverted yield curve is a bit of an anomaly. We wanted to know if Gagne expects these conditions to continue.
(Gagne) “These aren't normal conditions. We expect the norm, the yield curve to normalize at some point where we will have an upward sloping curve. But in the meantime, this is a great opportunity to lock in current yields at a much higher rate. Furthermore, if we expect that rates are going to eventually drop in the future, this will add price return to these short-term investments.”
Needless to say, the actions of the U.S. Federal Reserve, or Fed, play an outsized role in the short term bond market. We asked Gagne how potential rate cuts from the Fed shape his thinking about the Fund.
(Gagne) “As the market and interest rates continue to change, the biggest tool that we have is managing to a duration. In 2022 and 2023, when we knew that interest rates were going to continue to go higher as the Fed was hiking, we ran the portfolio much shorter than our peers would normally have run it. We had more investments in the 1- to 2-year area and less in the 4- to 5-year area. Now, as we anticipate that interest rates are going to be going higher and the Fed is done hiking, we are positioning the portfolio to be more nimble and duration-neutral. Therefore, it gives us the ability to adjust our investments as we see fit and as we get more clarity on what the Fed is going to do.”
We also wanted to get Gagne’s thoughts on how the Fed’s actions will affect the positioning of the Fund.
(Gagne) “I expect interest rates to be a positive influence on the Thrivent Limited Maturity Bond Fund in 2024. Even though we've seen a lot of rhetoric in the market that we're going to have rates higher for longer, we anticipate that at some point the Fed is going to reverse course and begin cutting rates. At that point, as fixed income investors know, as interest rates come down, prices go up. So, in the Limited Maturity Bond Fund, not only are you going to earn the current yield, but there's a potential to also have some price appreciation within the portfolio.”
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Next, we wanted to learn more about portfolio construction and the many steps taken by Swensen and Gagne before selecting bonds to add to the Fund. We started with Swensen:
(Swensen) “The strategy of choosing bonds on the corporate side is really a bottoms-up approach where it starts with the research teams. The research teams are a group of experienced analysts on both the investment grade and the high yield side. Analysts recommend whether to buy or sell individual companies within their sectors and also assess portfolio managers. And we decide what to invest in.”
We asked Gagne to elaborate on his approach to selecting bonds in the securitized market.
(Gagne) “When choosing specific bonds in the securitized market, we approach it much like the investment-grade side. We utilize our research team to underwrite every single deal that we look at and to do the analysis to make sure that we are principally protected because our number one goal for this portfolio is to get the principal back for our investors.”
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As Gagne mentioned, a goal of Thrivent Limited Maturity Bond Fund is to manage risk to stabilize the investor’s principal. We wanted to know how Swensen analyzes risk factors:
(Swensen) “Managing risk is a primary focus of the fund. Bonds have an asymmetric risk profile. While principal loss is very rare in the investment grade market, it does occur. So first and foremost, our research teams in both investment grade and high yields are monitoring our credits for new information that might change our opinion of a credit. We as portfolio managers sell any investments in which our core thesis has changed in a significantly negative way.”
Swensen emphasized that managing risk is a team effort where posing questions plays an important role.
(Swensen) “Our risk buckets are something we talk about and collaborate on. We ask ourselves, ‘How much risk do we want in the portfolio and what is that risk to be comprised of?’ and ‘Do we want more corporate exposure or more securitized exposure at any one point in time based on our economic outlook or market conditions?’ And also, ‘How much risk-free exposure or Treasuries do we want in the fund at any given time?’”
Gagne addressed how he assesses risk in securitized bonds.
(Gagne) “Typically, there is additional spread in the securities market and that comes from the structural and the prepayment risk that investors take. In this portfolio, we try to target AAA rated and the most senior bonds to avoid any extension and default risk.”
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Next, we wanted to learn what makes Thrivent Limited Maturity Bond Fund different from its peers. Swensen summed it up:
(Swensen) “The Fund is different than its peers given its flexible approach to asset allocation. This really goes back to J.P. and I being sector experts in securitized and corporates, which we aren't just a corporate fund or just a securitized fund as some of our peers are, but we have a tactical approach to looking at the market opportunities at any given time and deciding whether we want to allocate more towards securitized or in corporates.”
The Fund started in 1999. We wanted to learn what has changed since then. Here’s Swensen:
(Swensen) “Something that has changed a lot in the corporate market in recent years is with the advent of ETFs, liquidity has improved tremendously, which we as fund managers can look to take advantage of and securities that are mispriced due investor demand or the lack thereof. And then one other thing that something else that has changed a lot over the last decade is the amount of quantitative tools that are at our fingertips that we can use to manage on both an overall portfolio level and then also digging into slicing and dicing portfolios, looking at different risk profiles, whether it be duration, industry risk, country risk, all the different ways to look at risk within a portfolio.”
On the flip side, we wanted to know what about the fund hasn’t changed since its inception. Gagne said this:
(Gagne) “What hasn't changed is our approach to investing, really bottom up and we want to make sure that any investment that we make in here is going to return the principal back to the investor. Furthermore, we've kept the same mix of investments that we look at. We've always invested in treasuries and securitized and corporates. That mix changes over time. But we've always had those tools for us to invest in.”
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So, where do short-term bonds fit into a portfolio? Swensen says Thrivent Limited Maturity Bond Fund could be good for investors who are looking to earn yield. They need to tolerate some duration risk, but not to the extreme of potential price fluctuations that longer maturity bond funds might have. Gagne added some additional context:
(Gagne) “Consistency in the Fund is paramount. We take a lot of pride historically having a lower-than-average volatility and a higher-than-average return on this portfolio.”
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Once again, we would like to thank Cortney Swensen and J.P. Gagne for their insights. More episodes of Advisor’s Market360™ are available at thriventfunds.com. Email us at podcast@thriventfunds.com with your feedback, questions and topic suggestions for future episodes. And as always, you can learn more about us at thriventfunds.com and find other insights of interest to you, the driven financial advisor. Bye for now.
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All information and representations herein are as of April 1, 2024, unless otherwise noted.
Past performance is not necessarily indicative of future results.
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. High yield securities are subject to increased credit risk as well as liquidity risk. The Adviser's assessment of investments may prove incorrect, resulting in losses or poor performance. The Fund’s value is influenced by the performance of the broader market and by factors specific to an issuer within the Fund. When bond inventories are low in relation to the market size, there is the potential for decreased liquidity and increased price volatility. In unusual circumstances, the Fund could experience a loss when selling portfolio securities to meet redemption requests for a variety of reasons. These and other risks are described in the prospectus.
Thrivent Asset Management, a division of Thrivent, offers financial professionals a variety of investment products to help meet their clients’ needs. Thrivent Distributors, LLC is a member of FINRA and a subsidiary of Thrivent, the marketing name for Thrivent Financial for Lutherans.