What’s in store for bonds in 1Q 2021 as economies reopen?
1Q 2021 bond themes and potential opportunities as economies reopen.
The market uncertainties from the COVID-19 outbreak are expected to reinforce the dovish bias for central banks. Already, it’s an environment of low interest rates after central banks globally delivered more than 80 cut rates with around 9,000 basis points of easing1 in 2019.
In response to the impact of the public health crisis, the Reserve Bank of Australia (RBA) cut its cash rate two times to a record low of 0.25%. The RBA also rolled out a term funding facility of at least A$90 billion to support lending to small and medium-sized businesses. This is part of the government’s economic stimulus packages - totaling A$189 billion - that were rolled out to support Australian workers and business2.
Meanwhile, the US Federal Reserve lowered the federal funds rate to a target range of 0%-0.25% via two emergency rate cuts. The Fed also announced unlimited quantitative easing to help restore market liquidity3.
Still, in an ultra-low rate environment, investors can tap the entire global fixed income spectrum for potential attractive return opportunities. In uncertain periods, investors can adopt a defensive approach by shifting towards a quality tilt. And when opportunities arise, there is flexibility to add exposure to higher yielding fixed income assets which offer compelling valuations.
In the view of our Global Fixed Income, Currency & Commodities team, a heightened possibility of rate cuts this year, along with expanded central bank asset purchase programmes, should be supportive for government bonds and some high quality corporates.
At the same time, the fallout from COVID-19 could be particularly negative for sectors with highly leveraged companies where cash flow disruptions or delays could be damaging.
Therefore, defensive sector positioning is starting to pay off. We believe sector and credit selection will continue to be a key determinant of future returns.
Selection is key
As a hedge against the COVID-19 pandemic, we prefer high-quality duration in markets with relatively higher yields5, including the US, Canada and Australia.
In addition, we have been de-risking by increasing protection through credit derivatives and adding exposure to safe haven currencies such as the Japanese yen while removing exposure to emerging market currencies.
There will be a time to re-engage and add risk back into the portfolio. Emerging market debt and higher quality high-yield corporate bonds6 are beginning to look alluring at these new yield5 levels, though we need to see the risk unwind go further before we step in to capture the upside opportunities.
JPMorgan Global Bond Opportunities Fund7
The JPMorgan Global Bond Opportunities Fund is a flexible portfolio that seeks to uncover the best investing ideas across all geographies and sectors of fixed income – without being limited by any benchmark.
By investing dynamically across debt securities that have lower or negative correlations to each other, the Fund can capture fixed income opportunities in different market conditions while managing risk through diversification1.
Explore our investment solutions
Investors are trying to grapple with the impact of the COVID-19 outbreak and the ramifications for global economic activity and corporate earnings. They can remain defensive while keeping an eye on policy responses, and expect further de-risking.
As market uncertainties persist, a dynamic approach to asset allocation is essential, alongside active management. Investing dynamically across multiple fixed income sectors can help investors tap long-term total return opportunities in a volatile market.