Climate change: a sustainable investing megatrend
We discuss five megatrends related to climate change and the investment implications.
#ratehikes #duration #inflation
As market conditions evolve, seeking opportunities from different fixed income securities1 can help build a resilient and diversified portfolio. Such opportunities can include traditional assets such as government and investment-grade (IG) bonds as well as non-traditional assets like securitised credit3 and high-yield4 (HY) corporate bonds, as a part of an overall portfolio.
Where we see opportunities1
J.P. Morgan Asset Management’s Income Strategy employs a flexible approach across the fixed income investment universe to differentiate and invest where opportunities can be found, as illustrated below.
Sector breakdown of J.P. Morgan Asset Management’s Income Strategy
1. Duration positioning5
In fixed income investing, duration is a gauge of interest rate risk, showing how bond prices and yields will likely change when rates move. Generally, longer duration bonds may suffer more price decline in response to a rise in interest rate. Therefore, duration positioning has served both as a risk management6 tool as well as a source of alpha.
Currently, we prefer quality, short-duration bonds. Government bonds are one of the areas where we seek to add duration2,5. Yields on 10-year US Treasuries more than doubled this year, as of 8 June 2022, presenting some flight-to-quality opportunities2.
2. Corporate credit
Given an US economic slowdown would prompt US Treasury yields to decline, boosting bond prices, we believe IG bonds could benefit from the trend. Since investors are unlikely to completely sell down their equity allocation, the IG corporate debt could provide diversification for the overall portfolio construction.
Even though credit valuations looked relatively attractive, an active bottom-up evaluation across sectors such as HY4, as a part of an overall portfolio, is crucial in the current market environment. The fundamentals and valuations within the HY market continue to look attractive on a go-forward basis as corporate earnings remain robust in general.
3. Securitised assets3
On the dynamics surrounding multi-family commercial mortgage-backed securities, long-term demographic trends continue to support fundamentals for those properties and shorter lease terms allow properties to increase rents and cash flows in accordance with higher inflation.
Asset-backed securities continue to be buoyed by well-supported US consumer fundamentals, while non-agency mortgage-backed securities continues to be supported by the strength of both the US housing market and the US consumer.