This Year’s Top Bond Investors Disagree on Depth of US Recession

This year’s top US bond managers agree that Federal Reserve interest-rate cuts are inevitable this year. The main debate they see is how deep the economic pain gets.

In a chaotic start to 2023 that featured the most volatile trading in more than a decade, the Carillon Reams Core Plus Bond Fund and the Columbia Total Return Bond Fund have delivered the best returns among 112 US peers that actively manage at least $1 billion.

The funds have led the pack in recouping some of the staggering losses that they and the rest of the bond world suffered last year as the Fed tightened policy at the fastest clip in decades to tame inflation. Now these managers are assessing the breadth of the fallout from those rate increases, in particular the risk of a credit crunch following a spate of bank failures.

After boosting returns last quarter by anticipating the big shifts in front-end Treasuries, Todd Thompson and his fellow managers of Reams Asset Management’s Carillon Reams Core Plus Bond Fund are positioning for a soft landing as the more likely path for the economy. So, a slowdown but not necessarily a deep recession. It’s a scenario they expect will benefit high-grade corporate debt. For Columbia Threadneedle, however, the outlook is more dire, and they’re betting Treasury yields will revisit the lows seen in August 2022.

“The Fed is being overly aggressive in this cycle as they try and maintain their credibility in managing inflation,” said Jason Callan, who alongside Gene Tannuzzo manages the $2.7 billion Columbia Total Return Bond Fund. “There is more likelihood of a harder landing.”