3 Intermediate Core Bond Funds That Play Offense

Bond funds’ ability to make money when falling yields lead to higher prices for their bonds was on full display in late 2023. After the yield on the benchmark US Treasury 10-year note briefly touched 5.0% intraday on Oct. 19, the Morningstar US Core Bond Index surged 9% over the next 50 trading days to close out the year as the 10-year Treasury yield fell about 110 basis points. With yields ticking back up in 2024’s first half, investors may want to consider funds poised to benefit from another drop in yields as well as those that tend to flourish in other types of bond market rallies, such as when the market rewards credit risk.

The upside/downside capture ratio can help investors assess a fund’s likelihood to outperform in bond market rallies as well as its ability to preserve capital in downturns. The upside portion shows the degree to which a fund has gained more than an index in a particular period. For example, if the Morningstar US Core Bond Index returns 5% in a given calendar year, a fund that returns 6% will have gained 1.2 times the index and have an upside capture ratio of 120%. Conversely, a fund that loses 6% versus a 5% drop for the index would have a downside capture ratio of 120% for that calendar year.

Whether a fund assumes more interest-rate risk (longer duration) or achieves higher returns through a yield advantage versus the Bloomberg US Aggregate Bond Index, these three funds are solid long-term performers and feature high upside capture ratios relative to their downside protection.

BlackRock fixed-income CIO Rick Rieder leads the team that manages BlackRock Total Return MDHQX, which has a Morningstar Medalist Rating of Gold. This intermediate core-plus bond Morningstar Category offering blends top-down and bottom-up elements, and it typically dips into below-investment-grade and emerging-markets debt to take more credit risk than its Bloomberg US Aggregate Bond Index. The yield advantage of these sectors has helped it outperform in rallies. The fund doesn’t take as much duration risk as some peers, yet it still managed to capture 111% of the benchmark’s upside over the past five years, versus a downside capture ratio of 109% over the same period.

Silver-rated PGIM Total Return Bond PDBAX blends longer duration and a yield advantage to achieve its upside potential. This intermediate core-plus bond fund’s bias toward corporate bonds and securitized assets helps it outyield its typical peer. In addition, the fund’s duration tends to be longer than that of most rivals, which helps its upside capture ratio. Over the past five- and 10-year periods, the fund’s 120% upside capture helped it beat the benchmark in rallies, while its downside capture ratio was about 116%. Its average 6.6-year duration was longer than the index’s, while its 4.6% trailing 12-month yield was more than 120 basis points ahead of the Vanguard Total Bond Market Index’s VBTLX, a representative passive competitor.

Bronze-rated Western Asset Core Bond WATFX, an intermediate core bond fund, captures more upside than peers through its longer-duration bias versus most rivals. The fund’s 7.2-year average duration over the past three years was about 1.25 and 0.75 years longer than that of its typical peer and benchmark, respectively. The fund’s 10-year 118% upside capture ratio is one of the category’s highest. When long-term yields fell in 2019, for example, this fund’s 10.6% gain was about 1.9 percentage points better than the index’s. However, this upside potential comes with a bumpier ride; the strategy’s downside capture ratio was 119%, while its standard deviation, a measure of volatility, was also among the category’s highest.

This article first appeared in the May 2024 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.