With President Donald Trump's tariff threats turning into reality and the Federal Reserve likely to hold off on cutting rates, credit investors are continuing to bet on shorter-duration bonds. That paid off last year, when bonds maturing in less than a year outperformed their longer-duration counterparts, which are more sensitive to moves in yields, by more than 7 percentage points.

Principal Asset Management and Pacific Investment Management Co., who run the top performing investment-grade funds, also see attractive opportunities in riskier debt from higher-rated companies, particularly those in sectors set to benefit from the boom in artificial intelligence.

Bloomberg analyzed 2024 total returns of US mutual funds labeled "investment-grade" and "high yield" managing over $5 billion and $1 billion respectively. Those that emerged on top in the high-grade list favored shorter-dated bonds. 

The Principal Spectrum Preferred and Capital Securities Income Fund handed investors a total return of 9.81% last year, making it the top performer in the high-grade category. Trades that concentrated on US bank preferred stock, non-US banking additional tier 1 securities and junior subordinated debt from insurance companies paid off the most, according to Phil Jacoby, chief investment officer at Spectrum Asset Management, a boutique manager of Principal Asset Management.

"The fund will maintain its core positioning in junior subordination in 2025 in order to pick up the yield and income advantage over more senior corporate paper," Jacoby said.

Pimco, meanwhile, is finding the best opportunities outside of corporate bonds. Higher-quality fixed income assets like US government bonds and agency mortgage backed securities have seen spreads widen as the Fed pulls back from the space. 

That has created an attractive opportunity for the PIMCO Low Duration Income Fund at a time when corporate bond spreads are close to levels not seen in decades, according to Alfred Murata, portfolio manager of the fund. 

"We're benefiting from the fact that we can invest in very high quality assets, but also assets that have much wider spread than typical," he said.

Murata and his team have a neutral view on corporate credit and like debt from the biggest US banks. In the junk-bond market, they find sectors that are less sensitive economically the most attractive, including health care and telecom.

Pimco expects borrowers in sectors involved with providing the building blocks for artificial intelligence — including energy and technology — to benefit, though the money manager is cautious of potentially "significant disruptions" as a result of AI that could be negative.

"What we're trying to find are investments that have fixed-income-like downside protection and equity-like upside potential," said Murata.