Surging Yields May Spell Opportunity for Active Bond Funds

Originally published May 1, 2024

Surging Treasury yields continue to place rate cuts on the back burner, leading market experts to believe they may not happen until the end of the year. In the meantime, the current macroenvironment could spell opportunity for active bond funds.

The first quarter saw active bond funds experience increased flows, making it the highest in almost three years.

"About $90 billion flowed into active bond funds in the first quarter, the most for any three-month period since mid-2021," a Bloomberg report said. It noted that with yields at their highest in almost 20 years, it's an opportunity for investors to buy into bonds before rate cuts push yields down and subsequently, bond prices higher.

Additionally, fund managers can lock in current yields now before said rate cuts take place. It's a welcome change, especially for bond funds that need to offload holdings carrying low yields.

"It’s also a chance for active managers to rebuild their portfolios, which had been starved by years of near-zero interest rates," the report added.

The two-year Treasury note recently touched the 5% yield mark, but the capital markets are hoping it reached a ceiling. It could be a sign yields may be coming down, and subsequently, bond prices rising. Getting exposure to an active fund will help investors maintain flexibility when the bond market environment starts to change.