The portfolio manager for this year's best-performing multisector bond fund is having a hard time finding bonds to buy.

"We see very little value in the market right now," said Henry Peabody, portfolio manager for the Eaton Vance Multisector Income Fund (EVBAX) . "Yields are compressed and investors are not being compensated for the credit and interest rate risk they are taking."

The Eaton Vance Multisector Income Fund is up 19% thus far in 2016, outpacing 99% of its rivals in the multisector bond category, according to Morningstar. The $640 million fund has returned an average of 1.6% annually over the past three years, putting it in the 96th percentile.

Peabody said he is holding a lot of cash in his fund because the systemic and position risks are simply too high in the current market.

"A wise Midwestern investor once said 'cash is a call option on every asset.' And right now, that optionality is extremely valuable," said Peabody.

Peabody attributes his outperformance this year to sticking with a lot of his winning bets from last year, notably in energy and commodity issues. And while he is not putting a lot of money to work in the current environment, he is seeing opportunities in emerging markets like Mexico.

"We think Mexico offers a compelling risk/return tradeoff," said Peabody. "The peso has been weak due to Trump's rhetoric, as well as a poorly timed energy reform policy."

Peabody expects the Federal Reserve to raise rates in December, but proceed slowly from there. He said the transition to higher interest rates could cause a lot of pain for investors who are holding "far too much interest rate risk" in their portfolios.

He added that inflation could be one of the most "underappreciated risks in the market," which is why he is avoiding Treasury bonds altogether.

"Inflation is beginning to become a front page story, with mathematics of oil prices falling off, and well documented wage pressure," said Peabody. "However, markets do not reflect this in pricing. The only way that future obligations will be funded will be by inflating our way out of them."

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