Rising US budget deficits and national debt have put pressure on Treasuries and resulted in a ratings downgrade. While the risk of permanent loss is unlikely, it has caused an uptick in volatility for this US-backed debt. Fixed-income investors who have concerns can find strategies that limit exposure to Treasuries.
On May 16, 2025, Moody’s downgraded the US government credit rating one notch to Aa1 from AAA, citing the nation’s growing debt and the expectation that government borrowing will accelerate, driving long-term yields higher. While the Treasury market remains the largest, most liquid, and one of the safest in the world, the downgrade has put a strain on it, particularly on funds with heavy Treasury weightings.
Treasury yields spiked in response to the downgrade, driving bond prices lower because of their inverse relationship. The benchmark 10-year Treasury yield climbed to 4.6% by May 21, 2025, 30 basis points higher than it was at the beginning of the month. While higher yields eventually boost income potential for new investors, existing portfolios with large Treasuries positions are dealing with price declines and less confidence in Treasuries’ ability to hold their value.
Funds with smaller Treasury allocations held up better. Their broader diversification helped reduce the direct effects of the downgrade. Active managers in these strategies may also navigate shifting market conditions more flexibly than benchmarks such as the Bloomberg US Aggregate Bond Index, which typically holds about 40% of assets in Treasuries and another 30% in agency mortgage-backed securities, which carry an implied guarantee of the US government.
Let’s take a closer look at two strategies in the intermediate core-plus bond Morningstar Category that hold smaller stakes than most peers, which typically allocate about one-fifth of assets to Treasuries.
DoubleLine Total Return Bond DBLTX, which has a Morningstar Medalist Rating of Bronze, features higher income than most. Its 6.0% SEC yield as of July 2025 ranked in the top of intermediate core-plus bond category peers. Strong leadership steers this strategy. CEO and CIO Jeffrey Gundlach, known for his skill in managing mortgage-backed assets, works with comanagers Andrew Hsu and Ken Shinoda. While most peers favor corporate credit to generate higher yields, this fund leans on mortgage-backed securities and underweights Treasuries. The fund’s 3.3% of assets in Treasuries was over 15 percentage points lower than the category median.
The strategy’s process has evolved from the firm’s early days, as the team expanded from a compact squad of generalists to a much larger group of sector specialists, a more formalized process, and a proprietary risk and liquidity management system. The core philosophy remains rooted in careful security selection and portfolio construction. The managers use a barbell approach to balance risk, with nonagency residential mortgages and other structured credit on one side, and interest rate-sensitive bonds on the other.
American Funds Strategic Bond ANBEX offers a distinctive approach within the intermediate core-plus bond category. The fund’s 13.6% allocation to Treasuries as of June 2025 was about 5 percentage points lower than the category median, and its 4.9% SEC yield as of July 2025 ranked in the top quintile. The approach here is different from other American Funds strategies. Rather than each manager running a separate portfolio sleeve in line with the firm’s multimanager system, interest rate specialists Ritchie Tuazon and Timothy Ng and credit expert Damien McCann comanage 95% of assets. Securitized expert Xavier Goss and an analyst-led portfolio oversee 5%.
Top-down macroeconomic views, sector rotation, and security selection drive the strategy. Tuazon and Ng adjust interest rate and inflation sensitivity with derivatives and cash bonds; McCann focuses on corporate bonds. They seek undervalued segments, including MBS, often guided by Goss and the firm’s insights.
This article first appeared in the June 2025 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.