A sweet spot for bonds - if advisors stay disciplined

Excitement is not always welcome news for bond managers. In fact, steady—even boring—markets are often a sign that bonds are fulfilling their intended role for investors. 

Warren Pierson, co-chief investment officer at Baird Funds, told InvestmentNews at the recent Schwab IMPACT conference in Denver, Colorado, that while fixed income may not be experiencing a “pound the table” moment, it is offering compelling value across several segments. 

“We think there’s really good value in the bond market for investors,” Pierson said. “It’s primarily the level of interest rates.” While he joked that it is “not necessarily a really exciting time to be a bond manager,” he emphasized that yields remain attractive and the asset class has delivered “good value, good returns to investors this year.” Still, he urged advisors to take a measured approach: “We think it’s a time for investors to be kind of cautious overall, not take too much risk.” 

Quality carries the day 

Pierson said the team sees most opportunity in core investment-grade areas. “We’re overweight, nominally, investment-grade corporate bonds,” he said. “Yield spreads are historically tight, but the fundamentals still support this. We’re taking more of that exposure, albeit a bit shorter on the yield curve.” 

Beyond corporates, Pierson pointed to attractive opportunities in AAA-rated securitized bonds, select senior commercial mortgage-backed securities (CMBS), and certain non-agency residential mortgages. Municipals, he added, “still represent a pretty good value as well.” 

Across the board, however, he stressed the importance of moderation. “The nice thing for investors is they can get good value without taking a lot of risk. And indeed, we don’t think they should be taking a lot of risk at this juncture.” 

Advisors, he noted, are increasingly focused on stability—a shift driven in part by demographics. “We have an aging population. A lot of the boomers are retiring.” Many investors who were previously equity-heavy are shifting toward capital preservation as they roll 401(k)s into IRAs. “I think there’s more of a desire for stability in fixed income,” he said. “And again, the nice thing is, interest rates—relative to where they were three or four years ago—look pretty attractive.” 

The case for avoiding overreach 

On Federal Reserve policy, Pierson views the central bank’s trajectory as steady and predictable. “We think the Fed’s done a reasonably good job,” he said. “Our best guess at the neutral rate is probably around 3%. So, they’ve got about another 100 basis points to go.” Timing remains uncertain, but he believes the Fed will continue to be “data dependent,” seeking to support growth without letting inflation reignite. 

As for global diversification, Pierson was candid: “We’re a little bit biased, but we think some of the best opportunities are right here in the U.S.” While a weaker dollar has boosted non-U.S. assets, he said, “the level of interest rates in the U.S. is pretty attractive compared to other opportunities.” The U.S. economy, he added, has been “surprisingly resilient.” 

Pierson’s final guidance was straightforward: “There’s good value in the bond market. Don’t take too much risk.” He cautioned against chasing private markets simply because they are popular. “We see a lot of people looking at private markets… but they’re doing it at a time when those spreads are pretty tight.” Instead, he urged advisors to “keep it down the middle of the fairway,” stay within client risk parameters, and avoid “going way over your skis.”