March Madness: Who is the champion of fixed income investing?

Round 1:

(1) Core Plus vs. (16) Collateralized Loan Obligations
Collateralized Loan Obligations (CLO) interest is on the rise thanks to attractive floating rate yields and low historical defaults. But our two-time defending champion casts a wider net, holding a variety of diversifying exposures like broader securitized allocations, high yield, bank loans and yes, even CLOs. Core Plus advances.
 

(8) Investment Grade Corporates vs. (9) High Yield Corporates
If spreads were any tighter, this would be a pick'em. Take solace in the fact that the high yield market has more BB-rated bonds than almost any time in history, and the IG market, while still dominated by BBBs, is higher in quality and lower in duration since before the pandemic. Maybe tight spreads can stay tight for a while and you’re better off with some carry. High Yield Corporates advances.
 

(5) Short Duration vs. (12) Inflation-Protected Bond
Both lower beta plays on nominal Treasuries. If rates rise, short duration falls slightly. And if rates rise partially due to higher inflation expectations, TIPS also fall slightly. The difference is on the downside where lower real rates would benefit TIPS. Inflation-Protected Bond pulls the 12–5 upset.
 

(4) Private Debt vs. (13) Emerging Market Bond
These two return-seeking plays are under-represented in your portfolio. Like everything else in credit, dollar-denominated emerging market (EM) spreads are tight, but in today’s environment, spreads trading modestly tight vs. history looks like a bargain. Plus, if spreads widen, it’s more likely than not that Treasury yields fall, making duration-sensitive categories a bit more defensive than floating-rate categories. Emerging Market Bond advances.
 

(6) Multisector vs. (11) Nontraditional Bond
Both categories provide similar yields, multiple levers for active management and the ability to diversify core holdings. Feels like a Spider-Man meme. If we can’t combine them into one super team, I’ll lean on the higher credit quality and the more explicit duration management and pencil in Nontraditional Bond.
 

(3) Municipals vs. (14) Bank Loans
Bank loan yields have dipped into the 7s, providing the smallest tax-equivalent yield advantage over munis since 2022. For an investor with a 37% tax rate, a 3.6% muni yield becomes a 5.8% tax equivalent yield, getting you within striking distance of loans with much lower risk of defaults. Municipals.
 

(7) Treasuries vs. (10) Global Bond
Of the 25 other countries in the WGBI, only 5 have higher yields than the US. Don’t overthink it. Treasuries.
 

(2) Core Bond vs. (15) EM Local Currency
EM Local Currency is all over the place. Chinese yields under 2%. Brazilian yields of 14%. It creates an interesting active management backdrop, but I’ll take Core Bond here.

Round 2:

(1) Core Plus vs. (9) High Yield Corporates
Defense wins championships. Play both offense and defense instead of just offense. Core Plus.
 

(12) Inflation-Protected Bond vs. (13) Emerging Market Bond
Diversified EM bonds currently have a 3.2% yield advantage over TIPS, and with break-even inflation drifting back up toward fair value, I’m picking Emerging Market Bond.
 

(3) Municipals vs. (11) Nontraditional Bond
Munis are great for taxable accounts, but if you need them, you already have them, and if you don’t have them, you probably don’t need them. The marginal benefit of adding a nontraditional strategy to a portfolio is likely greater. Nontraditional Bond.
  

(2) Core Bond vs. (7) Treasuries
Core bonds have increasingly become a concentrated bet, with nearly 45% of the Bloomberg aggregate made up of US Treasuries. Instead of Treasuries in disguise, I’ll take actual Treasuries for a low-cost defensive portfolio line item that can provide liquidity in a market sell-off. Treasuries.

Final Four:

(1) Core Plus vs. (13) Emerging Market Bond
It was a nice run for EM bonds, but at this stage of the tourney, I don’t want one-dimensional strategies, and that includes dedicated pure plays in return-seeking categories. With Core Plus, I get components that provide income, total return, equity risk offset and capital preservation. A balanced offense and defense that would make KenPom proud. Core Plus.
 

(7) Treasuries vs. (11) Nontraditional Bond
As much as I like Treasuries, they’ve had an annualized return of zero over the past six years. Non-traditional bonds have outperformed with lower volatility, making this a better choice for those looking for risk-adjusted returns. Nontraditional Bond advances.

Finals: 

(1) Core Plus vs. (9) Nontraditional Bond
In a rematch of last year’s title matchup, we get both components of our “Core Plus Plus” idea, a combo that positions you to outperform on the upside and the downside. The resulting core-satellite approach provides multiple levers for diversification and active management. And with a thoughtful eye toward portfolio construction, you can hold 4–7 fixed income strategies in your portfolio instead of 10 or more, streamlining your lineup. But for this exercise we’re choosing one winner, and if you want to go to the moon, you gotta go with the satellite. The Pick: Nontraditional Bond.

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