Portfolio Chart: A menu of options as bond yields reset higher
With yields hovering close to decade highs across many fixed income sectors, investors are presented with a “menu of options”. Still, selectivity matters as recession risks loom.
Sep 2022 (2-minute read)
#ratehikes #duration #inflation
Key takeaways:
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
Source: J.P. Morgan Asset Management. The Strategy is an actively managed portfolio, holdings, sector weights, allocations and leverage, as applicable are subject to change at the discretion of the Investment Manager without notice. YTM by sector reflect actual holdings in portfolio. *Exposure net of hedging. Portfolio uses the highest available rating of Moody’s, Fitch, S&P, DBRS, Morningstar, Kroll. Agency MBS refers to agency mortgage-backed securities, non-agency MBS refers to non-agency mortgage-backed securities, CMBS refers to commercial mortgage-backed securities, ABS refers to asset-backed securities, HY corporate refers to high-yield corporate bonds, IG corporate refers to investment-grade corporate bonds, EM refers to emerging market. As of 31.08.2022.
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 20 September 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.
Jonathan Liang, Member of the Global Fixed Income, Currency & Commodities (GFICC) group, shares some of the key characteristics of the JPMorgan Income Fund at The Inside Network’s Income Symposium (Aug 2022).
Fine-tuning a bond portfolio as inflation hits the high notes
Investing across the full spectrum of fixed income solutions to manage risk while seeking to optimise yield in an inflationary world.
Provided for information only based on market conditions as of date of publication, not to be construed as investment recommendation or advice. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations, may or may not come to pass. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.
Diversification does not guarantee investment return and does not eliminate the risk of loss. Yield is not guaranteed. Positive yield does not imply positive return.
1. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.
2. Source: J.P. Morgan Asset Management, “ Global Fixed Income Views 3Q 2022”, 13.06.2022.
3. Securitisation is the process in which certain type of assets, such as mortgages or other types of loans, are pooled so that they can be repackaged into interest-bearing securities. Examples of securitised debt include asset-backed securities and mortgage-backed securities.
4. Investments in below investment-grade or unrated debt securities, may be subject to higher liquidity risks and credit risks comparing with investment-grade bonds, with an increased risk of loss of investment.
5. Duration is a measure of the sensitivity of the price (the value of the principal) of a fixed income investment to a change in interest rates and is expressed as number of years.
6. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.
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