Active bond investing as the world lives with inflation
We share our views on the fixed income opportunities in the current tough times.
Government bond yields have been on the rise since early this year. This has presented more room to manage the impact of rate hikes. To show how big this leeway could be, the breakeven point of a bond could be an indicator to look at.
A bond fund’s total return is generally determined by bond yields and the change in bond prices. Generally, when interest rates rise, bond prices would fall. Bond yields can therefore act as a buffer when bond prices decline. Different bonds react differently to changes in interest rates and the yields would also vary. A breakeven point can then be the indicator to help investors assess the magnitude of the yield level that could offset the impact of interest rate hikes. With a higher breakeven point, a bond would have more room to manage the impact of rising rates.
More room in global government bonds to help offset rate hikes
Some major central banks have been aggressively hiking interest rates this year, prompting government bond yields to rise in tandem with their breakeven points.
Take the UK 7-10 year gilt1 as an example, its breakeven point stood at 0.11% at the start of 2022 – which meant that it had 11 basis points to help buffer the impact of falling bond prices, as illustrated in the chart. This figure rose to 0.55%2, which indicated that prices would have to drop further to fully erode income from the bond’s coupon.
As such, government bonds currently present a bigger buffer, compared with early 2022, even with the continuous rise in interest rates.
Changing breakeven points across global government bonds
Using global government bonds to help manage volatility
Market volatility will likely persist in the short term amid continuing rate adjustments to tackle inflation.
We believe that government bonds could do more, in addition to acting as a buffer against rate hikes. Historically, government bonds are relatively less volatile, and they are generally granted the higher credit quality rating. As such, they can be a tool to help manage volatility within an overall portfolio to cope with slowing economic growth economy.
As of end of September 2022, the JPMorgan Global Bond Fund invests close to 70% in global government bonds or cash. Its historical volatility over the past five years stood at 3.82%3 with an average grade-A credit rating4. The Fund employs a flexible strategy to manage duration, enabling it to flexibly respond to the changing monetary policies of global central banks. As the Fund employs a disciplined risk management strategy including sensitivity analysis and scenario analysis5 etc, its performance over the past 10 years (from 1 January 2012 to 30 September 2022) has outperformed its benchmark in both rising and falling market environments6.
Outperformance in both rising and falling market environments