Taxable bond funds benefited in April from two types of investors: the fearful and the income hungry.
Investors who were jittery over issues ranging from conflict in Ukraine to the slowdown in China's growth retreated into the relative safety of Treasuries.
Investors who focused on income sought it in spread-oriented categories.
"The need for yield and lack of attractive supply pressed investors to put money to work across spread sectors and in Treasuries," said Rick Rieder, BlackRock's chief investment officer of fundamental fixed income.
Flexible income funds -- which focus on income generation by investing in debt as well as preferred and convertible securities -- led all taxable categories with their 1.22% gain on average, according to preliminary Lipper data.
Among other gainers, BBB-rated corporate funds rose 1.17%, TIPS funds 1.14% and Treasury funds 1.06%.
Flatter Yield Curve
The yield curve flattened slightly. The yield on two-year Treasury notes fell two basis points to 0.42%. The yield on 10-year notes fell six points to 2.67%, and 30-year bonds fell nine points to 3.47%.
The drop reflected rising prices on the longer end as many investors took on duration to boost yield. Rieder expects more of the same overall performance in the near term.
Real estate is one part of the market that Rieder likes. "Commercial mortgage bonds have been some of our favorites and continue to be," said Rieder, who co-manages of $15.5 billion BlackRock Strategic Income Opportunities .
Also, he expects bank debt to outperform. "In both Europe and the U.S., banks are expeditiously moving to meet regulatory guidelines and consequently are placing issuance at reasonable levels to get it done, as well as pave the way for potentially future issuance," he said.
In addition, many municipal bonds look attractively priced, especially on the long end.
In emerging markets, he likes debt from Indonesia and Mexico. "They are improving and stable, and aren't at risk of current account deficit problems," he said.
And he has been adding to his stake in U.S. Treasuries, especially on the long end, to manage volatility created by geopolitical events outside the U.S.
He held a 10-year Portugal government bond last month, with a 5.65% coupon, rated Ba3 by Moody's. Its price rose 3.58 to 116.34, giving it an April total return of 3.59% vs. 1.13% for Barclays Global Aggregate. Portugal's improved economy aided its ongoing fiscal reforms, Rieder said. Its improved ability to finance itself made its bonds more attractive.
Yield appetite ruled the roost among tax-exempt bond funds. It led to high-yield muni funds outperforming, averaging a 1.59% April gain.
States with high perceived headline risk paid hefty rates to attract buyers. California debt funds averaged 1.40%.
General and insured funds averaged 1.30%. Tax-exempts overall averaged a 1.11% gain.
Tax-exempts were driven in April by tight new supply in the face of stable demand, said Jennifer Tabak, lead manager of $351 million JPMorgan Municipal Income .
They also danced in step with Treasuries as usual, she added.
In addition, muni yield ratios vs. Treasuries were below their five-year averages. "That made them look more affordable, so crossover buyers (who normally prefer taxable bonds) came in," she said.
Puerto Rico bonds rallied late in April as the government closed in on a smaller, balanced budget thanks to $1.4 billion in cost cuts.
The market also did not react too negatively to Detroit's preliminary proposals for the size of the haircut to be imposed on its bondholders. "People are reluctant to react until things are finalized," Tabak said.
Tabak expects the muni market to be range bound. She sees new supply remaining constrained. Demand should stay around current levels, with the usual seasonal increase in June as investors reinvest coupon payments.
In April, Tabak held a Massachusetts health and education bond benefiting MIT. With a 5.25% coupon, maturing in July 2033, rated Aaa by Moody's, the bond's April total return was 2.74%.
Gaining confidence that the Federal Reserve is not going to start raising interest rates too soon, investors bid up prices on longer-duration bonds such as this for the sake of yield, Tabak said.