Although the market spotlight lately has favored equities, bond funds are still receiving inflows and remain popular, despite historic low interest rates and dark clouds on the horizon.

Bonds faced four strong years after the financial calamity in 2008, but fixed income today faces challenging conditions. For example, 10-year Treasurys are currently yielding less than 2%, close to the all-time low. Meanwhile, some bonds today are yielding at historic lows. Investors are concerned about safety issues following the recent financial travails suffered by Stockton, Calif., and other municipalities.

At a spirited press briefing in New York Wednesday, several veteran portfolio managers from Thornburg Investment Management discussed the challenges besetting the fixed-income market.

Jason Brady, managing director and head of taxable fixed income, gave an overview that didn’t prettify the problems facing investors. Brady is the portfolio manager or co-manager of four income taxable funds with laddered bond maturities of less than five years. He is also author of a recent book entitled Income Investing: An Intelligent Approach to Profiting from Bonds, Stocks, and Money Markets (McGraw-Hill).

“It’s been a tough environment for fixed income,” Brady said. “Investors have been looking for safety, and that option has been taken away.”

“The environment is challenging as the Fed [and, more broadly, global central bank] purchases continue to suppress yields on high-quality assets,” he explained. “This has led to additional, underappreciated risk given the change in risk/reward for those types of investments, as well as a revival of the ‘reach for yield’ trade. The typical rotation towards riskier assets has been on one hand accelerated by central bank action, and on the other restricted by a worse-than-usual investor experience in the last recession.”

In this environment, Brady said investors need to have a flexible understanding of risk and reward. “It’s not as simple as hiding in Treasurys anymore. The potential for loss in yield is still there. Yields can actually go lower,” he warned.

Privately held Thornburg, a moderate-sized asset manager based in Santa Fe, N.M., with roots dating back to 1982, manages $14 billion in taxable and municipal bonds. It offers six tax-exempt bond funds and three taxable bond funds. A 10th fund, the Thornburg Investment Income Builder Fund (TIBAX), a combination bond-and-stock fund with $13.3 billion in assets, has been gaining popularity with advisors for its growing dividend outlays, Thornburg said.

Since inception in 2002, the fund has returned 11.34%. Brady manages the vehicle along with co-managers Brian McMahon and Ben Kirby.

Sensitive Munis

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