Other bond funds had bigger allocations to agency MBS last year, and after selling some securities, they’re now underweight like Pimco.

At New York-based BlackRock, the world’s biggest money manager, the total return fund has been selling the securities since the end of the year, said Bob Miller, who manages the $6 billion fund. It has returned 0.8 percent this year, ahead of 67 percent of rivals after posting gains of 6.5 percent and beating 98 percent of peers over the past 12 months.

“It’s not a long-term move, but we currently think those securities are overpriced and could have more volatility until there’s greater clarity from the Federal Reserve on rate increases,” Miller said.

Prepayment Concerns

Western Asset Management, the bond unit of Legg Mason Inc., also sold agency bonds in the fourth quarter, in part because of concerns that more homeowners would prepay their mortgages. The fund now has a lower allocation than the benchmark index.

“The market last year became complacent on prepays,” said Carl Eichstaedt, who manages the $14.2 billion Western Asset Core Plus Bond Fund and the $3.6 billion Western Asset Core Bond Fund. “At some point we have to start to respect prepays again as the real estate market cures and prices stabilize and more people are above water again.”

Government-backed mortgage bonds are sensitive to swings in how fast homeowners refinance or move before their loans’ terms are over. That can cause debt trading for more than face value to pay off more quickly at par, and curb interest payments.

Buying CMBS

The Western funds have been buying commercial mortgage- backed securities, especially those tied to hotels, said Eichstaedt, who was one of three Western managers awarded fixed- income manager of the year by Morningstar in 2014.

Some managers are being more selective about the kinds of agency mortgage securities they buy. JPMorgan Chase & Co.’s core bond fund, which has about the same exposure to agency bonds as the Barclays Aggregate, has been buying MBS tied to multifamily buildings backed by Fannie Mae, said Doug Swanson, who helps run the $28 billion fund.