With fixed income markets facing heightened volatility, this Q&A from the FundCalibre team dives into how strategic bond fund managers are navigating uncertainty through flexibility and precision. Colin Finlayson, co-manager of the Aegon Strategic Bond fund, highlights the importance of managing duration risk, anticipating yield curve movements, and selecting corporate bonds based on bottom-up fundamentals. They also touch on the implications of tariffs, inflationary pressures, and fiscal policy on bond markets.
Why you should listen to the interview: Discover how experienced managers balance risk, spot opportunities in credit markets, and respond to macro shocks like tariffs and rate cuts—using flexibility as their greatest asset.
This interview was recorded on 7 May 2025. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, please listen to the full interview.
Interview highlights:
A broad range of opportunities
“We think of our strategic bond fund as being a sort of unconstrained or flexible fund that can give access to broad range of opportunities right across the fixed income universe. In terms of this year, the first thing I’d say is it’s certainly not been easy this year. There’s been a lot going on and we’ve tried to manage risks effectively and take advantage of a wide range of opportunities. This year so far, there’s really been sort of three different drivers of performance in three areas we’ve been focusing on.
“The first one in many ways is about taking less risk rather than more. Markets have been very uncertain. Volatility has been high, so conviction and taking large directional risks in the portfolios has been lower than it has been at times in the past. So one of those three areas of focus has been around duration risk, and we’ve been having the duration at levels around about the average of where it’s been over the last five years, and instead focused more on market selection.
“The second thing has been about positioning for changes in the shape of the yield curve. So we felt yield curves were too flat and were likely to steepen, so we wanted to own shorter dated bonds rather than longer dated bonds as we felt they offered a greater return potential and offered a little bit more protection, again, against this degree of uncertainty. And in so far this year, we’ve seen yield curves in the US and in Europe steepen up for different reasons. But it’s something that we were positioned for and benefited from.
“The third factor is around sort of corporate bond allocation. So again, credit spreads are tight, therefore the amount of risk we wanted to take was lower. And what instead we thought was a better way to add value was to focus more on bottom up security selection to generate returns. So reducing the beta and focusing more on the alpha from the individual bonds that we’ve been buying.
“So when you’re putting these three things together, that’s going to be driving the performance against what has been a very uncertain and volatile backdrop.”
Concerns about US debt
“My first reaction to the tariff announcements was that it was far more comprehensive and aggressive than I expected. A huge amount of uncertainty was injected into financial markets and into the economic outlook and the market response.
“I think in the US the story’s a little bit more complicated on the fiscal side and the bond issuance and what that might mean. And I think that’s still an issue. That’s still an overhang for the market. I don’t necessarily think that it’s been driven by the tariffs per se. In so much as what we saw in April in the US was almost like a sort of sell America theme. So whether it was US equities, US dollar, or US treasuries investors decided to spend their marginal euros or marginal powers somewhere else. And they decided to not, you know, not recycle assets back into the US partly because of the uncertainty that tariffs had brought.
“But the other factor is that the Trump administration wants to have some fiscal loosening to increase sort of the fiscal spending through tax cuts and such like, and right now they don’t have the headroom or the capacity to do that because they’re not doing a good enough job shrinking the debt and the deficit. What they also want to try and do is get their debt, the cost of debt, debt interest payments lower. So they need to either have less debt or the interest rate on that debt has to be lower. And until they managed to do that, then it’s very difficult for them to enact their kind of quite ambitious fiscal plans if they try to do that.
“And President Trump did make some noises about moving on to looking at tax cuts. And that was probably the catalyst I think for the kind of big sell-off that we saw in treasuries, particularly long dated treasuries. And that was their so-called bond vigilantes putting their hand up and saying, nah, not right now. We don’t have the bandwidth for that. The math doesn’t add up. And until you reduce the deficits efficiently, we’re not gonna sponsor that sort of that sort of approach.”
The fund’s positioning for the rest of the year
“The outlook in terms of different paths that we could go on from here, potentially economic outlooks, the path has really been as wide as it is right now, and that doesn’t generally sit well in financial markets. We like stability, they like more predictable outcomes. And that’s exactly what we’re not gonna get.
“So you need to use flexibility, whether that is on managing your interest rate risk, your credit risk, the markets you choose to invest in, the individual sectors that you want to you to lend money to, individual companies that will survive and not survive. All of that needs consideration and thing with strategic bond funds is that’s exactly what they’re designed for. You’ve got all these different levers you can pull on and you can have to use them all. Because having simply setting your fund up with big directional macro bits and assuming that they’re gonna work and pay off, I think is very, very dangerous. And it is a time to use flexibilities and not be static.
“So we’re absolutely doing everything we can to generate returns. Also just to manage the risk as well. Some of it’s about making sure you’re not exposed to parts of the market that are at risk and trying to protect yourself on the downside as much as it is as about managing upside risk. But the more flexibility you’ve got, the more avenues that are open to you to generate returns also improves your ability to manage your overall risk profile and by not concentrating your your risk into a handful of particular areas or particular biases within your within your strategy. So by using flexibility and we’ll be looking to do that in the coming months.”
Conclusion: As the economic landscape continues to shift, the conversation underscores the critical importance of remaining nimble in bond investing. Through informed security selection and proactive risk management, strategic bond funds can offer resilience and returns even in unpredictable conditions.
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