More of the Same for Bond Investors in the Third Quarter

The third quarter brought more volatility for bond-fund investors, who continued to navigate market choppiness. Discover how different strategies performed and which ones stood out in this insightful article.

Bank Loans Shine

Explore the performance of bank-loan funds amidst market volatility.

Bond investors who welcomed credit risk in their portfolios generally reaped the benefits during the third quarter. Bank loans, an asset class rooted in lower credit quality, continued their year-to-date momentum thanks to relatively healthy corporate fundamentals and higher short-term interest rates. With a rise in floating-rate coupons, bank-loan funds saw positive returns, outpacing their peers.

Among the top-performing bank-loan funds, Eaton Vance Floating-Rate Advantage Fund, a higher-octane offering that systematically employs leverage, rose 3.7% during the quarter and an impressive 10.8% for the year to date. T. Rowe Price Floating Rate, another standout in the category, delivered respectable returns of 8.9% for the year through September, in line with the typical fund.

Safety on the Short End of the Yield Curve

Discover how short duration strategies helped protect investors amidst rising yields.

Short duration strategies proved beneficial for investors as yields rose during the quarter. Funds that focused on the short end of the yield curve provided downside protection and even managed to generate gains. The typical ultrashort bond and short-term bond funds recorded gains of 1.4% and 0.7%, respectively, in the third quarter of 2023.

Pimco Low Duration Fund, with its shorter duration compared to peers, weathered interest-rate volatility better and outperformed 85% of its short-term bond category peers, delivering a 1.3% gain for the quarter. On the other hand, American Funds Intermediate Bond Fund of America, which carries higher interest-rate risk due to its longer duration positioning, lagged behind with a 0.6% loss.

Core Bond Performance Back in the Red

Explore the challenges faced by intermediate core bond strategies during the third quarter.

Intermediate core bond strategies, which invest in a mix of high-quality and longer-duration securities, experienced a setback in the third quarter. These strategies, represented by the Bloomberg Barclays U.S. Intermediate Government/Credit and Intermediate Core Bond Indexes, lost 3.2% and 3.0% respectively, wiping out their first-half gains.

However, Gold-rated Baird Aggregate Bond managed to provide relatively steady results amidst the rate volatility. By consistently matching the fund's duration to its benchmark, the team delivered a loss of 0.7% for the year through September, outperforming over 60% of its peers. American Funds Bond Fund of America, another Gold-rated strategy, faced challenges and landed in the worst quintile of the intermediate core bond peer group with a 1.7% loss year-to-date.

Muni Bonds Approach Uncharted Territory

Explore the performance of municipal bonds in a volatile market.

Municipal bonds followed the downward trend of taxable strategies in the third quarter. Rising tax-exempt yields, alongside Treasury yields, resulted in negative returns for the median national Morningstar Category fund. The Bloomberg Municipal Bond Index experienced consecutive negative returns for the first time since the early 1980s.

Despite the volatility, some muni-bond managers managed to generate positive returns. Silver-rated BlackRock National Municipal outperformed over 95% of its peers with a 0.3% gain. Vanguard Intermediate-Term Tax-Exempt, the largest fund in the category, recorded a loss of 0.6% year-to-date through September, slightly better than its peers.


The third quarter of 2023 proved to be a challenging period for bond-fund investors as they navigated market volatility. While some strategies faced setbacks, others managed to shine amidst the turbulence.

Bank-loan funds that embraced credit risk delivered strong performance, benefiting from healthy corporate fundamentals and higher short-term interest rates. Short duration strategies provided protection against rising yields, while some intermediate core bond strategies struggled. Municipal bonds faced a volatile market but certain managers generated positive returns.

As we move forward, it's important for investors to stay vigilant and adapt to changing market conditions. By carefully assessing the performance and risks of different bond-fund strategies, investors can make informed decisions to achieve their financial goals.


Q: How did bank-loan funds perform in the third quarter?

A: Bank-loan funds generally outperformed other bond-fund categories during the third quarter, benefiting from credit risk and higher short-term interest rates.

Q: What impact did rising yields have on bond-fund performance?

A: Rising yields had a negative impact on strategies with longer durations, while short duration strategies provided protection against the yield increase.

Q: Did municipal bonds perform well during the third quarter?

A: Municipal bonds faced challenges in a volatile market, but certain managers were able to generate positive returns.

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