At a crossroads as rates rise? Here’s what a bond indicator is telling us
Rising government bond yields have presented more room to manage the impact of rate hikes. How big is this leeway?
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Key takeaways:
These are tough times for income investors where market volatility still persists, the macroeconomic outlook remains uncertain and central banks are forced to pivot hawkishly to tame soaring prices1,2.
We share how we navigate interest rate risk and where we see opportunities1.
A view of the hawkish journey ahead
The global economic outlook will continue to be shaped by developments on inflation and labour market fronts as well as the scale, speed and duration of central bank tightening2.
Inflation
Without a resolution to the Russia-Ukraine conflict, energy and food prices are unlikely to fall without government subsidies.
Labour market
Tight labour markets in the US and the UK imply that wage gains are likely to be persistent, reinforcing higher prices in housing, goods and services.
Central bank tightening
The Federal Reserve continues to aggressively increase the federal funds rate in order to tame persistently high inflation. We believe the interest rate could rise from its current level to at least 4.75% in the near term.
Still, this is not to say that everything is bleak. US and European corporate balance sheets have continued to remain strong. The US consumer and state and local governments have built up excess savings in deposit balances and rainy-day funds respectively, while fiscal aid has been deployed to help offset higher energy costs.
Where we see opportunities1
Under current market conditions, we believe that some fixed income sectors can still present opportunities.
Annualised returns and volatility
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Source: Bloomberg Finance L.P., Dow Jones, FactSet, MSCI, Standard & Poor’s, J.P. Morgan Asset Management. Bond and cash indices are Bloomberg US Treasury – Bills (1-3 months) (Cash), Bloomberg US Aggregate Index (US bonds), J.P. Morgan Asia Credit Index (Asian bonds), J.P. Morgan Emerging Market Bond Index Global (EMD), Bloomberg US Aggregate Credit – Corporate High Yield Index (US HY). Equity indices are the S&P 500 Index (US), MSCI World Index (DM), MSCI AC Asia Pacific ex-Japan Index (APxJ), MSCI AC Asia ex-Japan Index (AxJ), MSCI Europe Index (Europe), MSCI Emerging Markets Index (EM). High-dividend equity indices are MSCI World High Dividend Yield Index (DM HD), MSCI AC Asia ex-Japan High Dividend Yield Index (AxJ HD), MSCI AC Asia Pacific ex-Japan High Dividend Yield Index (APxJ HD), MSCI Emerging Markets High Dividend Yield Index (EM HD). *Monthly total returns between 30.09.2007 and 30.09.2022 are used for all asset classes. Past performance is not a reliable indicator of current and future results. Indices do not include fees or operating expenses and are not available for actual investment. Data reflect most recently available as of 30.09.2022.
Managing interest rate risk
Hunting for yield across sectors
- Duration positioning3
We continue to optimise market rallies to reduce both our interest rate exposure and our credit risk4. As part of the overall portfolio allocation1, we continue to prefer high-quality, short-duration bonds and have high conviction for short-dated German bonds.
- Corporate credit
We believe that yields on investment-grade corporate bonds with one- to two-year maturities and higher quality securitised credit5 have increased meaningfully year-to-date and may help manage the impact of future interest rate rises.
- Emerging market debt
Emerging market (EM) central banks have increased interest rates significantly well ahead of their developed market (DM) peers, resulting in meaningfully higher real yields for local EM debt. This is in contrast to DM debt where real yields have remained negative. However, currency stability against the US dollar will be crucial to drive significant EM allocations.
- Securitised assets5
We continue to have a favourable view on dynamics surrounding multi-family commercial mortgage-backed securities, where 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.
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 purposesonly 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 4Q 2022”, 19.09.2022.
3. 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.
4. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.
5. 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.
Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current and future results. Funds which are invested in emerging markets and smaller companies may also involve a higher degree of risk and are usually more sensitive to price movements. 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.
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