It is a tricky moment for bond investing, thanks to stubborn inflation risks and a muddy outlook for interest rates. The Iran war added to inflation pressures, but now there is a framework for ending it in place and oil prices are falling. The Federal Reserve has a new chief in Kevin Warsh and, somewhat surprisingly, he appears more likely to raise rates than to cut them. How are investment advisors navigating this environment? That's the question we put to a panel of them for this week's Barron's Advisor Big Q.

Eric Hough, director of asset management, Great Valley Advisor Group: We've had the stance for more than two years that inflation is going to be sticky. Our plan really hasn't changed in the past few weeks with Warsh coming on board. We've already been tactically short duration on the yield curve, which allows us to be more nimble.

We are higher up in credit quality, focusing more on investment grade. I was a little worried that Warsh would come in and just keep cutting rates, and we'd end up with a larger inflation problem. But the back end of the curve has now kind of settled down. It's a little less clear what will happen in the future. The Fed has always been very good about providing guidance to the investor and analyst base. I think we're going to see a little less guidance going forward. You can see [the lack of clarity] already, with Citigroup saying we're still going to have three cuts by the first quarter of next year, and Bank of America saying we're going to have three hikes by the beginning of next year. So overall we are staying tight to the belt [or conservatively positioned] when it comes to the duration and credit quality of our public fixed income portfolio.

In the private credit markets you're seeing redemption gates going up. Most of those loans were done at much lower rates, and many people probably don't realize that 90% to 95% of those loans are floating rate. Incremental moves higher in rates are much more drastic for smaller companies than larger companies. We're looking toward the end of the year and being tactical in private credit. As rates increase a little bit you'll be able to make new loans at higher rates with new covenants. Six- to 12-months from now could be a good time to increase your credit exposure, especially on the private side.

Stash Graham, managing director, chief investment officer, Graham Capital Wealth Management: We've been on the shorter end of the yield curve, and I think that's where you have to go over at least the next couple of quarters. The pressure on long bonds right now is that everyone's trying to suss out what the inflationary pressures are going to look like.

We had a CPI report that eased some concerns about accelerating inflation, but we have seen pockets of inflation in a variety of measures that have pointed to pressure. And this was even before the conflict in the Middle East, which has obviously now added another layer.

You're going to have to watch what happens to inflation, whether it's PCE or CPI, and then you can throw in PPI, which came in hotter than what people were expecting in the most recent report. This is going to be an issue for the remainder of the year. Even if we have a peace agreement, there's going to be a follow-on to this. It's going to restrict what the Federal Reserve can do. The core PCE reading that just came out for the month of May, I think, inhibits the Fed from even considering rate cuts at the beginning of next year. I certainly think duration right now is the enemy, and you need to shorten as much as you can.

Cyrus Amini, chief investment officer, Hyphen Wealth Management: I'm managing more to credit than duration [or interest rate risk]. I want to get paid to take on credit risk. I don't necessarily want to get paid to take duration risk. And specifically I don't just manage to the Agg [Bloomberg U.S. Aggregate Bond Index]. It's mostly a duration bet, kind of like diversification masked as duration. [The Agg is heavy on long-dated bonds, which react more to interest-rate moves.] If hiking is on the table for the Fed, then duration [or investments in interest-rate sensitive longer term bonds] is one of the last things I want to own.

I use active managers in high yield -- that's fixed, floating, and I also use a kind of a short-duration high-yield strategy. These managers would have been handling business lines within the larger banks back before the financial crisis. So they are extremely high-quality managers that base all their investments on bottom-up fundamentals and underwriting in the high-yield space.

You're seeing a good amount of dispersion in the market across credits and even across sectors. Managers like these are able to take advantage of that and get paid for the risk they're taking on. So I will look for attractive opportunities on the short end that will be managed by the shorter-duration high yield manager. And then for something that's a little longer out, there's less duration risk within high yield. I want a manager that is going to go out and truly underwrite the credits and be very selective. Again, I don't want managers in fixed income that are managing to a benchmark, certainly not the Agg. I want managers going out there as if they themselves were lending the money to these issuers.

Bridget Costello, wealth advisor, Kayne Anderson Rudnick: One of the things we do for our clients is to avoid bond mutual funds. In a rising-interest-rate environment investors see the NAV of their bond mutual funds going down. They'll think, well, bonds are my safe investment, why are these going down? They put in for redemptions, and the portfolio manager is forced to sell bonds at unattractive prices, which leads to poor performance. So particularly in a rising-interest-rate environment, it's important to stay away from mutual funds and build individual bond portfolios.

We emphasize building laddered portfolios and staying on the shorter end of the yield curve so that we have reinvestment opportunities. We talk ad nauseam to our clients about the fact that we're going to hold these bonds until they mature or get called in. So when they look at their statements and see that their bonds are declining because interest rates are going up, that's not reality for them -- because we're going to hold these bonds until they mature.

That's a big education piece. If there's a way for us to go out a little further on the curve and pick up incremental yield we do that. But we certainly don't want to take on extra risk. Bonds are supposed to be the boring part of the portfolio.

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June 24, 2026 15:39 ET (19:39 GMT)

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