How Two Top Capital Group Bond Fund Managers are Navigating This Volatile Market

Long-term bond yields have made wide swings in recent weeks, raising eyebrows and concerns in some quarters. But those moves don’t tell the whole story of the bond market. For Chitrang Purani and Shannon Ward, who serve as managers on a combined 13 funds and exchange-traded funds at Capital Group, other corners of the bond market have shown resiliency. Still, they say volatility in long-term yields and the high-yield market is likely to continue in a headline-driven environment.

For Purani, a portfolio manager on the Gold-rated $91.3 billion Bond Fund of America ABNFX and the $2.1 billion Capital Group Core Bond ETF CGCB, that calls for a continued defensive posture. Ward, a portfolio manager on the Silver-rated $23.0 billion American High Income Trust AHIFX and $17.2 billion American Funds Multi-Sector Income Fund MIAYX, says a conservative posture ahead of the market turmoil lets one put money to work in more attractively priced bonds.

The bond market has been in the spotlight in recent weeks, thanks to an unusual rise in yields following President Donald Trump’s harsher-than-expected tariffs announced on April 2. After an initial drop, the yield on the widely-watched 10-year US Treasury note jumped despite elevated expectations that these trade wars could lead to a recession.

Yields have since fallen back, and in some parts of the bond market, they’ve reversed their post-tariff moves. However, the moves were worth exploring. “Clearly, we’re seeing a lot of volatility in the capital markets,” explains Purani. “It’s important to really decompose the drivers of the move behind this bond market volatility.” He points to a difference in performance among short-term Treasuries (which track short-term expectations for the economy and Federal Reserve policy) and longer-term maturities. “Not all Treasuries are created equally. We see the long end of the Treasury curve exhibit more volatility and front end of the Treasury curve focused a little bit more on the near-term path for growth and inflation,” he says.

Why Have Long-Term Yields Been So Volatile?

Swings in long-term bond prices have been driven by a confluence of factors, including the inflationary impact of tariffs, the forced unwinding of bond holdings among some investors, concerns about the status of the US dollar as a global reserve currency, and the impact of smaller trade surpluses with countries that have been buyers of US Treasuries but may have fewer US dollars to put to work in US Treasuries.

“What we attempt to do with our economists, with our analysts and across the portfolio management team, is get a sense of the different scenarios for trade policies could play out, and then have an understanding of how those scenarios map to certain economic outcomes, and what those economic outcomes can mean in terms of the reaction function for the Fed as well as the markets,” Purani says. “That framework is what we use to try to figure out where value exists in the market and where it doesn’t.” The challenge is uncertainty around what the effective tariff rate will be for the United States. “But as this level of uncertainty persists, it’s likely that growth will weaken, and as growth weakens, there could be more of a a premium on shorter maturity bonds.”

Under one scenario, Purani says that if trade tensions deescalate and tariff rates turn out lower than what is currently threatened, economic growth can hold steady and there would be more attention on tax and regulatory efforts. With the markets currently expecting the Federal Reserve to take the federal-funds rate down to 3%.0-3.5% from its current range of 4.25%-4.50%, current levels make for “a fair yield, on top of which our active bond strategies can deliver a little bit more return, around 5.00%.”

Purani continues: “However, if we go to the other end of the spectrum to a scenario of higher effective tariffs, you might get more recessionary concerns, which might price in the potential for the Fed to cut a lot more. Bond prices should then be attractive in the front end of the curve, although the back end of the curve might exhibit a little bit more risk premium.” Higher tariffs could lead to less long-term foreign capital inflows into the Treasury market.

Adding all this together, Purani sees a recipe for a cautious stance: “In the context of ongoing uncertainty and current valuations, our core bond strategies are broadly positioned in a defensive manner. We continue to take advantage of areas where the risk/reward symmetry appears positive, for example, we’re currently emphasizing interest rate exposure across intermediate maturities and tilting up-in-quality across a diverse array of credit sectors. As always, we remain opportunistic, especially ahead of what’s likely to be a period of elevated volatility and performance dispersion across bond markets.”

A ‘Rational’ Selloff in High Yield

For Ward, a portfolio manager on nine of Capital Group’s mutual funds and one ETF, the specifics of the market backdrop may be unusual, but the general strategy for volatility in the high-yield bond market remains the same. “You never know what the downturn or the cycle is going to look like,” she says. “There’s always something different, but you have a downturn playbook prepared for situations like this … The pattern of how markets behave is really pretty similar.”

Ward notes that coming into 2025, yields on bonds with below-investment-grade ratings were trading at historically slim levels above US Treasury bonds. “When spreads are tight as they’ve been, you position the portfolio conservatively, because you’re not getting paid for incrementally taking risk,” she says. “We went through a good scouring of the portfolio to see that we liked everything that we held, then you can take a little bit more front foot when the market gives you opportunities like it has over the last couple of weeks. So you have to be prepared ahead of time, which means paying attention to where spreads are relative to the risks that are in the in the market.”

While yield bonds took it on the chin after Trump’s tariffs announcement, Ward says the response in the market was logical: ”The better-performing companies are the ones that are in sectors that are more insulated or just have better balance sheets that can withstand [tariffs]. Retailers are not doing well. Consumer products companies are not doing well. Metals and mining companies, as well, because they’re sort of at the target. But then there are lots of sectors that are doing absolutely fine. And so in that way, it’s sort of rational.”

That doesn’t mean it was a smooth ride, however. “The reaction is bigger than you would see under a different sort of normal recessionary backdrop, where you’d have slower moves,” she says. “We’ve seen moves that are more volatile in the short run than you would in a normal scenario. It’s about ‘What is this headline going to do to this company at this moment in time?’ This has not been one of those market dynamics where people just were throwing everything out the window.”

Against this backdrop, Ward says she was putting money to work during the high-yield bond downdraft. “Having a bit more liquidity on hand and having the ability to take advantage of things like forced selling away from us is essentially how we’re spending our time,” she says.

“The portfolio is set up to take advantage of the volatility we have been seeing, with cash that can be deployed into attractively priced offerings,” Ward says. “We took advantage of the tight spread environment of the last few quarters to invest more in sectors that should do relatively well in a slowing economy. The high-yield market is of higher quality than it’s ever been, with no single sector dominating results, and our portfolio reflects this.”