A yield revival in fixed income

Starting yields have increased significantly across different fixed income sectors.

Source: Bloomberg, FactSet, J.P. Morgan Credit Research, J.P. Morgan Asset Management. Data as of 31.07.2023. US Treasuries: Bloomberg US Treasury Index; US MBS: Bloomberg US Mortgage-Backed Securities (MBS) Index; US ABS: Bloomberg Asset-Backed Securities Index; US IG: Bloomberg US Corporate Index; Global IG: Bloomberg Global Aggregate Corporate Index; Europe IG: Bloomberg Euro Aggregate Corporate Bond Index; Asia IG: J.P. Morgan Asian Credit Investment Grade Index; Europe HY: Bloomberg Pan European High Yield (HY) Index; US HY: Bloomberg US Corporate High Yield Bond Index; Asia HY: J.P. Morgan Asian Credit High Yield Index; Global HY: Bloomberg Global High Yield Index; Leveraged Loans: J.P. Morgan Leveraged Loan Index; Local Emerging Market Debt (EMD): J.P. Morgan GBI-EM Global Diversified Index; USD Asia Credit: J.P. Morgan Asia Credit Index (JACI); USD China Offshore Credit: J.P. Morgan Asia Credit China Index; USD EMD: J.P. Morgan Emerging Market Bond Index (EMBI) Global Diversified Index; EM Corporates (Corp): J.P. Morgan Corporate Emerging Market Bond Index (CEMBI) Broad Diversified Index. All sectors shown are yield-to-worst. Yield-to-worst is the lowest possible yield that can be received on a bond apart from the company defaulting. Past performance is not indicative of current or future results. Yield is not guaranteed. Positive yield does not imply positive return.
 

• The significant repricing in fixed income markets has restored “income” to fixed income. As the chart highlights, valuations look relatively attractive across a broad range of fixed income sectors, with current bond yields close to decade highs and meaningfully above the past 10-year median.
• This is a favourable outcome for two reasons. First, higher yields improve the availability of income, presenting opportunities for consistent cash flows that can be a steady source of return during periods of elevated volatility. It also creates room for yields to fall again (as bond prices increase) in the event of an economic downturn. On the flipside, it presents a reasonable buffer that can help cushion performance against future increases in interest rates or credit spread widening.
• Second, higher starting yields typically translate to a relatively attractive risk-reward for bonds as yields historically account for a meaningful share of total return for the asset class over the long term.
   

Staying active with fixed income

• Nevertheless, investors should remain prudent and avoid carelessly reaching for yield without understanding the underlying credit risks in higher yielding segments of the bond market such as emerging market bonds and high yield corporate debt¹.
• Rigorous bottom-up credit selection, thoughtful sector and regional diversification and active duration management are important to make the most of the wider fixed income opportunity set. This can help create more resilient fixed income portfolios that can weather uncertain economic conditions.

Provided for information only based on market conditions as of date of publication, not to be construed as offer, 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.

1. 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.Yield is not guaranteed. Positive yield does not imply positive return.

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