Understanding Investing

The Benefits of a Diversified Bond Portfolio

See how the year-to-year movement of the bond markets demonstrate the importance of maintaining a diversified portfolio.

Bond investors can choose from a broad, global array of sectors, each of which offers a distinct risk/return profile.

What this chart shows
This “quilt” chart ranks the annual returns of a wide range of bond sectors, from best to worst, over the last decade. Performance has varied widely, with no single sector dominating year after year.

What it means for investors
Maintaining a diversified bond portfolio can help investors prepare for shifts in the economy and interest rates, allowing them to capture opportunities while also minimizing the risks of overconcentration.

Related Videos

Section:
Tag:
Date:
Expert:
Ticker:
Reset All

Bonds for Income

Bonds can offer attractive growth at an acceptable level of risk.

Disclosures

Data as of 31 December 2017. ■ T-bills represented by the Citigroup 3-Month T-Bill Index, an index of 3-month Treasury bills. ■ Short Treasuries represented by the BofA Merrill Lynch 1–3 Year Treasury Index, an index consisting of U.S. Treasury obligations having maturities from 1 to 2.99 years. ■ High yield represented by the BofA Merrill Lynch U.S. High Yield BB-B Rated Index, an unmanaged market index composed of various fixed income securities rated BB and B. ■ Mortgages represented by the Bloomberg Barclays Mortgage Backed Securities Index, which is composed of mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC). ■ Investment grade corporate bonds represented by the Bloomberg Barclays U.S. Credit Index, which tracks publicly issued, fixed rate, non-convertible investment grade corporate debt. ■ BAGG, the Bloomberg Barclays U.S. Aggregate Index, represents the domestic investment grade fixed rate, taxable bond market. ■ Intermediate Treasuries represented by the Bloomberg Barclays Intermediate Treasury Index, which is composed of Treasury bonds with maturities between 1 and 9.9 years. ■ Foreign (hedged) represented by the J.P. Morgan GBI Global ex. U.S. Index Hedged in USD, an unmanaged index representative of the total return performance in U.S. dollars of major non-U.S. bond markets. ■ Municipals represented by the Bloomberg Barclays Municipal Index, which tracks investment grade tax-exempt fixed rate municipal bonds with maturities greater than 2 years. ■ Long Treasuries represented by the Bloomberg Barclays Long-Term Treasury Index, which is composed of Treasury bonds with maturities greater than 10 years. ■ Emerging markets represented by the J.P. Morgan Emerging Markets Bond Index Global, which tracks total return for U.S. dollar-denominated debt instruments issued by selected emerging market countries. ■ U.S. TIPS represented by the Bloomberg Barclays U.S. TIPS Index, an index made up of U.S. Treasury Inflation-Protected Securities. ■ Global (unhedged) represented by the J.P. Morgan GBI Global Unhedged Index, an unmanaged market index representative of the total return performance in U.S. dollars on an unhedged basis of major world bond markets. ■ Bank Loans represented by Credit Suisse First Boston (CSFB) Leveraged Loan Index, which tracks the performance of senior floating rate bank loans. It is not possible to invest directly in an unmanaged index.

A word about risk: Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Bank loans are often less liquid than other types of debt instruments and general market and financial conditions may affect the prepayment of bank loans, as such the prepayments cannot be predicted with accuracy. There is no assurance that the liquidation of any collateral from a secured bank loan would satisfy the borrower’s obligation, or that such collateral could be liquidated. Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. Diversification does not ensure against loss.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. It is not possible to invest directly in an unmanaged index. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (25 The North Colonnade, Canary Wharf, London E14 5HS) in the UK. The Italy branch is additionally regulated by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Deutschland GmbH Italian Branch (Company No. 10005170963) and PIMCO Deutschland GmbH Swedish Branch (SCRO Reg. No. 516410-9190) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch and Swedish Branch are additionally supervised by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act and the Swedish Financial Supervisory Authority (Finansinspektionen) in accordance with Chapter 25 Sections 12-14 of the Swedish Securities Markets Act, respectively. The services provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 31a para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2), Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. The services provided by PIMCO (Schweiz) GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862 (PIMCO Australia). This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd (Toranomon Towers Office 18F, 4-1-28, Toranomon, Minato-ku, Tokyo, Japan 105-0001) Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association and The Investment Trusts Association, Japan. Investment management products and services offered by PIMCO Japan Ltd are offered only to persons within its respective jurisdiction, and are not available to persons where provision of such products or services is unauthorized. Valuations of assets will fluctuate based upon prices of securities and values of derivative transactions in the portfolio, market conditions, interest rates and credit risk, among others. Investments in foreign currency denominated assets will be affected by foreign exchange rates. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein.| PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Edifício Internacional Rio Praia do Flamengo, 154 1o andar, Rio de Janeiro – RJ Brasil 22210-906. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. © 2018, PIMCO.

CMR2017-1011-293848