Today we have a guest post from David Klug, CFA, portfolio specialist with the Montgomery Fixed-Income team, a subadvisor of the Wells Fargo Core Bond Fund.

The recovery from the 2008 financial crisis has seen the Federal Reserve keep interest rates near zero for the better part of a decade. Unprecedented monetary policy, both in the U.S. and increasingly overseas, has had plenty of unintended consequences across the financial markets. One of the effects was driving investors away from their traditional allocations toward core fixed income. Starved for yield, many investors turned to dividend-paying stocks or to lower-rated/quality bonds. Others turned the core bond portion of their portfolios over to core-plus funds seeking to get additional returns. Still others shortened duration, betting that a sharp rise in rates was just around the corner. As the volatility of the past several quarters showed, however, these investors also ended up taking on additional risk. After this long period of reaching for yield, now is a good time for investors to reassess where they stand and ask themselves, “Do I know how much risk I’ve added to my portfolio?”

Turtle and rabbits

Not all core bond strategies are the same—you need to know what you own. David Klug, CFA, portfolio specialist with the Montgomery Fixed Income team explains.

Brian Jacobsen: I’m Brian Jacobsen, and you are On the Trading DeskSM. This week, we’re discussing the role core bonds play in a volatile market. With us is David Klug, CFA and portfolio specialist with the Montgomery Fixed Income team at Wells Capital Management—the team that manages the core bond strategy for Wells Fargo Funds. Welcome, David; thanks for being here.

David Klug: Great to be here.

Brian: Can you maybe give us a little bit of an overview of what volatility looks like right now in the bond market or as it’s looked over the last year?

David: It’s been an interesting ride. It’s been a volatile year across asset classes. Fixed income has been no exception, and I think the current environment, certainly the last year plus, has been one that’s shined a pretty bright light on fixed-income managers and got investors thinking about both how much risk their fixed-income managers are taking and, I think, also what kinds of risks their fixed-income managers are taking.