To cushion the economic impact of the acute respiratory pandemic, central banks have continued to expand their monetary policy toolkits, providing support to fixed income sectors outside of just core government bonds.
 

Central bank bond purchases¹

Estimates, forecasts or projections are indicative and may or may not come to pass.
 

New and revised initiatives by the US Federal Reserve (Fed) since March have extended its reach into the corporate bond market, i.e. the so-called credit assets. The Fed will purchase bonds directly from investment-grade issuers as well as bonds that are already trading in the secondary market.

The goal is to improve market liquidity and to reduce the difference in yields between government bonds and corporate bonds (known as credit spreads). Bond credit spreads act as a kind of thermometer for economic health – narrowing credit spreads tend to be a good indicator.

Enormous monetary support may initially stave off some corporate defaults, but riskier credit securities, such as those backed by weaker businesses, will not be fundamentally strengthened in the long-term. In this regard, a shift towards quality names also applies to investing in the high yield (HY)⁴ bond market.


Could inflation be the silent killer?

The enemy of bond investors is inflation. This silent killer lurks in the background, slowly eroding the purchasing power of our money over time – making today’s money worth less in the future. This is why we seek to have our investments deliver returns that outperform inflation — what’s known as a ‘real’ or inflation-adjusted return.
 

US real yield⁶

Indeed, given low interest rates, real yields⁵ today on government bonds in the US are negative when adjusted for inflation. The debate is whether the trillions of dollars of fiscal and monetary stimulus will eventually result in higher rates of inflation.

However, given that inflation did not materialise in the aftermath of the policy response to the Global Financial Crisis, it’s difficult to see the current situation being different⁷. There may be spikes in spending as individuals and households once again find their freedom, but spending patterns may change and savings rate increase over the long term, leading to lower rates of consumption overall, thereby keeping inflation in check.

7. Provided for information only, not to be construed as investment advice. Estimates may or may not come pass. Past performance is not a reliable indicator of current and future results.

Conclusion

To navigate market uncertainty, bond investors could focus on quality opportunities presented across all segments of the global fixed income market. This means a focus on quality when thinking about income from bonds as well as investing in bond securities that are beneficiaries of central bank purchases. 

Provided for information only based on market conditions as of date of publication, not to be construed as investment recommendation or advice. Forecasts/ estimates may or may not come to pass.

1. Source: Bank of England, Bank of Japan, Bloomberg Finance L.P., European Central Bank, US Federal Reserve, J.P. Morgan Asset Management.
*New purchases of bonds are based on period to period changes in average holdings during the quarter across various asset purchase programmes as reported by each respective G4 central bank (the Bank of England, the Bank of Japan, the European Central Bank and the US Federal Reserve), announced purchase plans of these central banks and J.P. Morgan Asset Management projections, converted to common currency by average quarterly exchange rates. Data as of 31.03.2020.
2. 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.
3. Diversification does not guarantee investment return and does not eliminate the risk of loss.
4. High-yield credit refers to corporate bonds which are given ratings below investment grade and are deemed to have a higher risk of default. For illustrative purposes only, exact allocation of portfolio depends on each individual’s circumstances and market conditions. Yield is not guaranteed. Positive yield does not imply positive return.
5. Yield is not guaranteed. Positive yield does not imply positive return.
6. Source: FactSet, Federal Reserve, J.P. Morgan Asset Management. Real 10-year and 2-year Treasury yields are calculated as the daily Treasury yields less year-over-year core consumer price index inflation for that month except for March 2020, where real yields are calculated by subtracting February 2020 year-over-year core inflation. Data reflect most recently available as of 31.03.2020.

Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current and future results. Please refer to the offering document(s) for details, including the risk factors. Investors should consult professional advice before investing. Investments are not similar to or comparable with fixed deposits. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice. Estimates, assumptions and projections are provided for information only and may or may not come to pass. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.