The impact of interest rate changes on core bond managers

April 2023

The market has experienced dramatic changes in interest rates in recent years. In this paper, we seek to evaluate if the universe of fixed income managers – specifically active core bond managers – has engaged in trying to “time the market” based on these fluctuating interest rates, and to what degree they have been successful.

Before evaluating performance, it is important to first review a central concept of investing in bonds. Interest rates have an inverse relationship with bond prices. As interest rates rise, the price for bonds typically drops, and vice versa.

Some active bond managers may seek to use these relationships to their advantage by trying to time the market.2 These managers may reduce their sensitivity to interest rates when they believe rates will rise and, conversely, increase their sensitivity to interest rates when they predict rates will fall. The most common approach for adjusting interest rate exposure is to shorten or lengthen the duration of the portfolio.