Business Cycle: Boring Bond Funds

About: Nuveen Multi-Market Income Fund, Inc. (JMM), Includes: ACWV, BAB, BBBMX, BIAEX, BIV, FRIFX, FSREX, ITE, PONAX, PRSNX, RIGS, SPIB, VFICX
by: Charles Bolin

The US and Global economies are slowing down and much of the Treasury yield curve has inverted.

Lower risk funds classified as Great Owl Funds by Mutual Fund Observer that are likely to do well in this late stage and possible recession are listed with risk metrics.

An all bond portfolio of 10 funds is created using Mutual Fund Observer, Morningstar and Portfolio Visualizer. The Fund Spotlight is on Nuveen Multi-Market Income Fund.


As an investor starting in the 1990s, I was bombarded with statistics about the best (or only way) to invest was "buy and hold" stocks, and it served me well for that era. I spent more than the past decade reading about business cycles, and what I used to consider as the "boring bond funds". Authors such as Ed Easterling, Gregory L. Morris, James Picerno, Lars Tvede, and Howard Marks have taught me that a good defensive strategy is required as well as offensive. This article looks at a slowing US and global economy and how to play defensively.

The first part of this article looks at the yield curve and evidence of a slowing economy. Those readers only interested in funds may want to skip down to the section titled, "Mutual Fund Observer - Great Owl Funds".

Wolf Richter penned an interesting article last week, "Treasury Market Acts Like The Economy Is In A Death Spiral, But Wait..." pointing out that investors had sought safety during 2015 and 2016 only to be burned when interest rates quickly rose in the fourth quarter. I took a closer look at this time period and its similarity to now, as I shifted from short term bonds to intermediate bonds over the past year anticipating an end to the credit tightening cycle.

Chart #1 below shows the annualized return of the Vanguard Intermediate Term Bond ETF (BIV) as the black text at the top of the chart, 10 year minus 2 year Treasury yield difference (green line), 10 year Treasury rate (red line), and GDPNow (dashed black line). Since the 10 year Treasury rate began falling in November 2017, BIV has returned 8.2% at an annual rate. To Mr. Richter's point, BIV returned 5.5% on an annual basis from October 2013 through July 2016, only to lose 3.9% (annual rate) through the end of the year.

Differences between 2016 and 2019 are that the Federal Funds rate has risen significantly from 2015, GDPNow is estimating GDP growth that is slowing, and the 10 year minus 2 year Treasury yield curve is close to inverting. This article looks at the risks in the current investment environment and searches for low risk funds with high risk adjusted returns with a focus on bond funds.

Chart #1: Federal Funds Rate, Yield Curve and GDPNow

Source: Created by Author using Federal Reserve Bank of St. Louis

More on the Yield Curve

Therefore if we have a positively-sloping yield curve, the unbiased expectations hypothesis states that the market expects spot interest rates to rise. Equally, an inverted yield curve is an indication that spot rates are expected to fall. If interest rates are expected to rise, then longer yields should be higher than shorted ones to reflect this... For instance, if interest rates are expected to fall, investors will purchase long-dated bonds in order to 'lock in' the current high long-dated yield. Analyzing & Interpreting the Yield Curve, Moorad Choudhry

Chart #2 is the current yield curve (thick black line) and the yield curve from 6 months ago (thick blue line). The yield curve has moved from an upward yield curve showing bond investors believed in continuing growth to one which is mostly inverted suggesting an increased risk of a recession over the next one or two years. The two lighter blue lines are the yield curve in January and July 2016 before the sharp increase in 10 year treasury yields. They suggest that most bond investors believed in 2016 that the economy was growing.

Chart #2: Yield Curves in 2016 and 2019

Source: Created by the Author

Chart #3 shows another view of the Yield Curve based on the percent of the curve that has inverted. No parts of the Yield Curve were inverted in 2015 or 2016 while they are in 2019. There were partial inversions in 1995 and 1998 that were not followed immediately by recessions.

Chart #3: Yield Curve and Recessions

Source: Created by the Author

Leading Indicators

Chart #4 is my Leading Indicator which is composited from The Philadelphia Fed Leading Index, Chicago Fed National Activity Index, Conference Board Leading Indicator, among others. Even if the current downward trend continues, a recession is unlikely to start in 2019. The indicator has been at current levels in 1995, 2012, and 2016 without being followed by a recession.

Chart #4: Composite Leading Indicator

Source: Created by the Author

Chart #5 is the Organisation for Economic Co-operation and Development's forecast of slowing economic growth both globally (black line) and for the U.S. (red line).

Chart #5: OECD Global and US Economic Forecasts

Source: OECD Real GDP Forecast

The US Federal Reserve forecasts and surveys estimate a slow down for the second quarter. The Atlanta Fed GDPNow forecast is now 1.4% for the second quarter real GDP growth while the New York Fed Staff Nowcast stands at 1.5%. The Survey of Professional Forecasters conducted by the Federal Reserve Bank of Philadelphia is shown below, which is in agreement of slow growth.

Table #1: Survey of Professional Forecasters

Source: Second Quarter 2019 Survey of Professional Forecasters

In "World Bank Cuts Global Outlook as Trade Tumbles to Decade Low", Sarah MacGregor at Bloomberg describes the World Bank's view of the impact of slowing trade growth on its 2019 global growth forecast:

The bank forecast that the world economy will expand 2.6% this year, compared with a projection of 2.9% it made in January and easing from an estimated 3% last year, the bank said in its twice-yearly Global Economic Prospects report released Tuesday.

The International Monetary Fund has also cut its global economic forecast as described in "IMF Cuts Global Growth Outlook to Lowest Pace Since Crisis".

The world economy will grow 3.3 percent this year, down from the 3.5 percent the IMF had forecast for 2019 in January, the fund said Tuesday in its latest World Economic Outlook. The 2019 growth rate would be the weakest since 2009, when the world economy shrank. It's the third time the IMF has downgraded its outlook in six months.

Steven Hansen reports Econintersect's economic indicator to YOY GDP growth in Chart #6.

Chart #6: Econintersect Economic Forecast

Source: June 2019 Economic Forecast Index Continues To Indicate A Slowing Economy,

Investment Model

Chart #7 is the Investment Model that I built based upon about a 100 economic, financial, monetary, household, risk, global, and corporate indicators. Its guidance is to have about 30 to 40% in equities. The red line shows that the weakness is broad and increasing.

Chart #7: Investment Model

Source: Created by the Author

I like Fidelity's articles on the business cycle. Below is one chart showing the current placement of major economies in the business cycle. They point out that not all paths are along the theoretical business cycle curve, meaning that a country may have a soft landing instead of entering a recession.

Chart #8: Fidelity Update to Hypothetical Business Cycle

Source: Fidelity

Classic Late Cycle Performance

Fidelity has articles on how sectors perform during stages of the business cycle. Many of the sectors that do well in a late stage are doing well now such as utilities (FUTY, RYU, VPU, FXU), communications (FCOM), consumer staples (XLP, VDC), health care (IHI, FSMEX, VHT), value (YAFFX, YACKX), real estate (VNQ, FREL, ICF, FRIFX), and global real estate (FFR). Other funds doing well now are low volatility (SPLV, LGLV, USMV, ACWV), dividend (FVD, HDV, VIG, SDY), long-term bonds (VGLT), intermediate bonds (BIV, GBF, AGG, BND), corporate bonds (CORP, VFICX), world bonds (IAGG, VTABX), multi-sector bonds (IOFIX, PTIAX, PONAX, FSRIX), municipal long bonds (FHIGX, VWAHX, FTABX), municipal intermediate bonds (VWITX, FLTMX) and preferred stock (FPE). For those looking for a simpler system, there are allocation funds (INKM, AOK, AOM, VWIAX).

Mutual Fund Observer - Great Owl Funds

I buy dozens of investing and economics books each year, and the least interesting to me get pushed back in favor of the more current topics. Such is the case with "Bonds - The Unbeaten Path to Secure Investment Growth" by Hildy Richelson & Stan Richelson. This past month, I read the 2007 edition, which was particularly interesting because it was written prior to the financial crisis. The Richelsons' recognized that mortgage-backed carried "risks that were hard to define because of the complexity of their structure." I am going to highlight a few points from the book:

Convertible Bond Funds

Convertible bond funds behave more like stocks than bonds and are a steamy addition to any portfolio... These funds perform best when the stock market is on a roll and interest rates are rising. If you are looking for safe-income, it's best to look elsewhere.

High Yield Corporate Bond Funds

The perceived wisdom on the street is that the best time to buy these funds is after there has been a shakeout in the corporate market, with lots of defaults.

Loan-Participation Funds

This type of fund consists primarily of repackaged bank loans and contains risky credits made to finance many financial activities, including highly leveraged buyouts, mergers, and acquisitions. When the economy is troubled, the liquidity of these securities evaporates.

Strategic or Multisector Bond Funds

Players seeking high total returns in the high-yield, foreign, and U.S. bond markets gravitate to this type of fund... They are considered to be very high risk.

I downloaded the Mutual Fund Observer Summary data for funds classified as Great Owls excluding fund categories that tend to not do well in a bear market. I reduced the funds by metrics that indicate how the funds will perform during a major bear market such as Ulcer Index and draw down. I also eliminated the funds with low yields. Below are the low risk funds with high risk adjusted returns with one per Lipper Category. Different time periods were used to eliminate riskier funds.

Table #2: Great Owl Funds, Low Risk, High Risk Adjusted Returns (18 months)

Symbol Name Category APR /yr MAX DD Ulcer Martin Yld Trend 10mon
Very Conservative
FPNIX New Income Alt Credit Focus 2.8 0.0 0.0 - 3.3 1.6
BBBMX Limited Duration Short Inv Grd Debt 2.8 0.0 0.0 - 2.8 1.6
FTSM Enh Short Maturity Short-Intmdt Inv Grd Debt 2.2 0.0 0.0 - 2.4 1.0
HOLD Core Reserves Global Income 2.1 0.0 0.0 - 2.2 1.1
PYAIX Abs Return Abs Return 2.9 -0.2 0.1 10.8 3.7 2.1
BIAEX Tax Ex Bond Muni Intmdt Debt 4.1 -0.7 0.3 6.9 3.3 3.0
DODIX Income Core Bond 2.8 -1.3 0.8 1.1 3.0 3.4
ORSYX Short Term Muni Muni Short Debt 2.0 -0.3 0.1 0.5 2.2 1.3
FSREX Real Estate Income Real Estate 5.9 -2.8 1.1 3.5 5.7 4.2
TAIAX Tax-Adv Grwth&Inc Mixed-Asset Moderate 5.7 -4.5 1.8 2.1 2.5 4.2
VWINX Wellesley Income Mixed-Asset Consv 4.9 -3.5 1.9 1.6 3.1 4.6
FIKFX Freedom Income Mixed-Asset Today 3.5 -2.3 1.1 1.5 2.0 3.1
SRRAX Strat Real Rtn Infl Prot Bond 2.9 -2.7 0.9 1.1 4.1 2.7
LPXIX Low Dur. Pref & Inc Flexible Income 2.6 -2.5 0.7 0.9 4.6 2.9
VMNVX Global Min Vol Global Small-/Mid-Cap 8.3 -8.2 2.7 2.4 2.2 5.0
ACWV Min Vol Global Global Multi-Cap Core 8.5 -6.6 2.8 2.3 2.1 5.2
SPLV S&P 500 Low Volatility Multi-Cap Core 12.5 -6.9 2.6 4.0 2.0 8.8
LVHD Low Vol High Div Multi-Cap Value 7.5 -7.5 3.3 1.7 3.4 6.3

Source: Created by the Author based on Mutual Fund Observer

Boring Bond Funds

For this article, I build an all bond portfolio using Mutual Fund Observer (MFO) to rate and rank funds based on risk (Ulcer Index), risk adjusted reward (Martin Ratio), MFO Great Owl Classification, 3 and 10 month trends, and yield. I use the past 12 months because of the rotation to late stage assets. Portfolio visualizer is then used to optimize portfolios using one fund per Lipper Category. The one exception is Nuveen Multi-Market (JMM) which is a closed-end fund. I selected it based on a discussion and subsequent research.

Ten bond funds are selected to be in two portfolios with varying allocations based on a target volatility of 2.5% and Maximum Sharpe Ratio, along with one equal weight portfolio. I exclude high yield bonds and highly leveraged funds.

Below are the 12 month metrics for the final 10 funds selected to be in the All Bond Portfolios for June. They are sorted from lowest risk (Ulcer Index) to highest. Compared to the S&P 500, each of these funds is going to be less volatile and have a lower maximum draw down during a recession.

Table #3: Mutual Fund Observer 12 Month Metrics

Symbol Category APR% MAXDD Ulcer Sharpe Rating Age Yrs Exp Ratio Yield
BBBMX Short Inv Grade Debt 3.4 0.0 0.0 2.0 5 18.3 0.3 2.8
VUSFX Ultra-Short Obl 3.1 0.0 0.0 2.8 5 4.2 0.1 2.5
BIAEX Muni Interm Debt 5.8 -0.7 0.2 2.0 5 6.8 0.5 3.3
SPIB Corp Debt BBB-Rated 6.0 -0.8 0.3 1.6 5 10.2 0.07 3.1
ITE U.S. Treas Gen 5.3 -0.9 0.4 1.1 5 11.9 0.1 2.1
JMM US Mortgage 4.6 -1.4 0.6 1.0 2 30.3 0.0 4.5
RIGS Multi-Sector Income 4.7 -1.0 0.4 1.2 4 5.5 0.5 4.2
VFICX Core Bond 6.5 -1.0 0.4 1.5 5 25.4 0.2 3.2
PRSNX Global Income 4.8 -1.1 0.6 0.9 3 10.3 0.6 3.7
BAB General Bond 6.4 -2.1 0.8 1.0 3 9.4 0.3 4.1

Source: Created by the Author based on Morningstar

Below is the Efficient Frontier from Portfolio Visualizer which is a comparison of return versus volatility (standard deviation) for the past 12 months. By comparison, through the end of May, the S&P 500 has returned 5.1%, including dividends, with a standard deviation of 17.7%. Each of the bond funds has a maximum draw down of 0 to 2.1% while the S&P had a maximum draw down of 13.5%. Most of the bond funds have outperformed the S&P 500 for the past 12 months.

Chart #9: Efficient Frontier for All Bond Portfolio (12 months)

Source: Created by the Author based on Portfolio Visualizer

The All Bond Portfolio is intended to identify funds that will probably do well in the current environment and in a recession. They are not intended to be long term portfolios as shown in Chart #10 (which shows return vs volatility for the past 4 years) because of the low rate environment.

Chart #10: Efficient Frontier for All Bond Portfolio (4 Years)

Source: Created by the Author based on Portfolio Visualizer

The link to Backtest Portfolio Asset Allocation in Portfolio Visualizer is provided for those who want to change funds or allocations. Table #4 shows The All Bond Portfolios have outperformed the S&P 500 over the past 12 months with less volatility.

Table #4: Performance of All Bond Portfolios

Ticker Name Max Sharpe Equal Weight Max Rtn 2.5% Vol
BAB Invesco Taxable Muni Bond ETF 5% 10% 15%
BBBMX BBH Limited Duration N 15% 10% 5%
BIAEX Brown Advisory Tax Exmpt Bond 15% 10% 11%
JMM Nuveen Multi-Market Income 5% 14%
ITE SPDR Blmbg Brclys Intrm Trm Trs 7% 10% 5%
PRSNX T Rowe Price Glbl Multi-Sect Bd 13% 10% 15%
RIGS RiverFront Strategic Income ETF 15% 10% 5%
SPIB SPDR Portfolio Interm Term Corp 5% 10% 10%
VFICX Vanguard Interm-Term Invmt-Grade 5% 10% 15%
VUSFX Vanguard Ultra-Short-Term Bond 15% 10% 5%
Compound Avg Annual Return 5.6% 6.2% 6.8%
Standard Deviation 1.7% 2.1% 2.5%
Max. Drawdown -0.4% -0.6% -0.8%
Sharpe Ratio 2.0 1.9 1.8
Sortino Ratio 5.2 5.2 5.0
US Stock Market Correlation 0.15 0.00 -0.04

Source: Created by the Author based on Portfolio Visualizer

The 10 funds are plotted in Chart #11.

Chart #11: April Model Bond Funds

Source: Created by the Author based on Portfolio Visualizer

Table #5 contains the returns and credit metrics from Morningstar. Note that JMM funds are rated "B". This is discussed further in the next section.

Table #5: Fund Metrics

Ticker Category Rating Tot Rtn 3 Mo Tot Rtn YTD Tot Rtn 12 Month

Credit Quality

Dur Yrs SEC Div Yld DivYld TTM Tax Cost Ratio 3 Yr
VUSFX Ultrashort Bond 3 1.1 1.8 3.3 BBB 0.9 2.7 2.6 0.8
BBBMX Ultrashort Bond 5 1.2 2.4 3.7 A 0.9 2.6 2.9 1.0
RIGS World Bond 5 2.1 5.1 5.9 Not Rated 2.9 4.3 1.8
PRSNX World Bond Hdgd 4 3.2 5.7 7.6 BB 4.1 3.7 3.8 1.5
BIAEX Muni Nation Interm 4 3.3 6.4 BBB 4.6 3.1
SPIB Corp Bond 2 3.3 6.1 7.5 BBB 4.3 3.1 3.1 1.2
ITE Interm Gov 3 4.2 AAA 5.2 2.0 2.2 0.7
VFICX Corp Bond 3 4.0 6.4 8.4 BBB 5.4 2.9 3.2 1.4
JMM Interm Core Bond 4 4.4 8.4 8.1 B 4.5 2.1
BAB Long-Term Bond 5 6.1 7.3 10.8 A 8.4 3.3 4.0 1.7

Source: Created by the Author based on Morningstar

Fund Spotlight - Nuveen Multi-Market Income (JMM)

Closed-end bond funds selling at a discount to their NAV are popular when interest rates are declining. At such times, the yield on the bonds in the portfolio is attractive because it's higher than current market rates... When the yield curve is flat or inverted, the storm clouds appear on the horizon. Leverage becomes less profitable, and your total return will fall... If interest rates increase after you purchase a closed-end fund, you can have the worst of two worlds: declining income and declining market value. Bonds - The Unbeaten Path to Secure Investment Growth, Hildy Richelson & Stan Richelson

The Nuveen website describes the JMM fund as, "The Fund's objective is to provide high monthly income consistent with prudent risk to capital."

The fund will invest primarily in debt securities, including, but not limited to, U.S. agency and privately issued mortgage-backed securities, corporate debt securities, and asset-backed securities. At least 65% of the fund's total assets must be invested in securities that, at the time of purchase, are rated investment-grade or of comparable quality. The fund may utilize derivatives including options; futures contracts; options on futures contracts; interest-rate caps, collars and floors; interest-rate, total return, and credit default swap agreements; and options on the foregoing type of swap agreements. The fund uses leverage.

Readers interested in learning more about JMM may want to read "JMM: Still 'Prudent'" written by Maks F. S. on Seeking Alpha in 2017 or his previous article on JMM, "Nuveen Multi-Market Income Fund - A 'Prudent' Core Income Fund" from 2016. I have updated one of his charts comparing JMM to other multi-sector and mortgage bond funds. The funds are: BlackRock Multi-Sector Income CEF (BIT), BlackRock Income Trust (BKT), DoubleLine Income Solutions CEF (DSL), First Trust Mortgage Income CEF (FMY), PIMCO Dynamic Credit & Mortgage CEF (PCI), and Vanguard Mortgage Backed Securities ETF (VMBS). The takeaway is that JMM has less risk than many of the funds in similar categories.

Chart #12: Income, Multi-sector and Mortgage Bond Funds

Chart Data by YCharts

According to the Fact Sheet, JMM has $106M in Total Managed Assets and net assets of $76M. Daily volume is over 15,000 shares. Effective Leverage is 29%. Its distribution rate is 5.0% of share price. It is trading at a discount of 9%. During 2016 and 2017, its discount ranged between 7.6% and 9.2%. Institutions own about a third of the shares.

According to Morningstar, returns for the past 1, 3, 5 and 10 years have been 8.1%, 5.1%, 4.6%, and 8.3% respectively. Approximately 70% of its bonds have maturities greater than 10 years. Over 75% of its fixed income is securitized. Its largest holding are in bonds from Federal National Mortgage Association and Federal Home Loan Mortgage Corporation.

Chart #13 shows the drawdowns for JMM using Portfolio Visualizer.

Chart #13: JMM Drawdowns

Source: Portfolio Visualizer


In my opinion, in the medium term, interest rates are more likely to go down than up. This article may provide some ideas to investors seeking safety in bond funds.

Nuveen Multi-Market Income (JMM) is classified by Lipper as "US Mortgage". It is a leveraged, closed-end fund along with those inherit risks. It is selling at a discount and has lower risk characteristics than many CEFs. Although I do not own JMM, it is a fund that I would consider purchasing for the current environment.

Disclosure: I am/we are long PRSNX, FIKFX, FPNIX, FRIFX, FXU, PONAX, SPLV, VTABX, VWIAX, YAFFX, VMNVX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am an engineer with an MBA nearing retirement and not an economist nor an investment professional. The information provided is for educational purposes and should not be considered as advice. Investors should do their due diligence research and/or use an investment professional.