As the global economy is gradually recovering from the fallout of the global public health crisis, interest rates are expected to stay low for longer to sustain economic activities. Currently, the search of income could be likened to a triathlon, and adopting a consistent yet flexible investment approach is essential.

Liquidity support

After the onset of the global public health crisis and the financial market lows in March, global central banks and governments have responded with monetary and fiscal policies that are unprecedented in size, timing and coordination.

The amount of US Treasury purchased by the Federal Reserve between mid-March 2020 and mid-June 2020 accounted for about 8% of American gross domestic product, the highest share ever since the US rolled out the first round of quantitative easing during the global financial crisis in 2008¹.

Low correlation drives diversification

The fixed income universe comprises diverse sectors, and their performance could vary as different factors come into play, including interest rate risk, credit risk, sovereign risk and liquidity risk.

Extended fixed income sectors such as MBS and ABS have underlying assets which are mostly loans extended to individuals, setting them apart from corporate bonds which are closely tied to company balance sheets. As MBS and ABS are tapping into the balance sheets of consumers, these extended sectors have lower correlation to corporate bonds.

A diversified fixed income strategy investing across sectors with lower or negative correlation could help broaden income and return potential while managing portfolio volatility.

Yields and correlations of fixed income sectors⁴

4. Source: Barclays, Bloomberg Finance L.P., FactSet, ICE BofAMerrill Lynch, J.P. Morgan Economics Research, MSCI, J.P. Morgan Asset Management. Based on Bloomberg Barclays US Treasury (UST) Bellwether 10y (10y UST), Bloomberg Barclays US Credit – Investment Grade & High Yield (US IG & HY), Bloomberg Barclays US Securitised: ABS Index (US ABS), Bloomberg Barclays US Aggregate Securitised – Mortgage-Backed Securities (US MBS), Bloomberg Barclays Pan-European High Yield (Europe HY), J.P. Morgan GBI-EM Global (Local EMD), J.P. Morgan EMBI Global (USD EMD), J.P. Morgan Asia Credit (JACI) (USD Asia Credit), J.P. Morgan Asia Credit (JACI) – High Yield (USD Asia HY), J.P. Morgan Asia Credit China Index (USD China offshore credit), J.P. Morgan CEMBI (USD EMD corporates), J.P. Morgan Asia Diversified (JADE) (Local Asia). *Correlations are based on 10-years of monthly returns. Yield is not guaranteed. Positive yield does not imply positive return. Past performance is not a reliable indicator of current and future results. Data reflect most recently available as of 30.09.2020.

Seeking yield as rates stay low⁵
 

1. Keep quality in mind
    
   • A focus on quality is key for bond selection in uncertain times.
     
     
   • Adopting a bottom-up approach to find corporate bonds that are backed by stronger balance sheets, and able to operate through a downturn.
      
2. Invest flexibly across the full fixed income spectrum
    
   • Tapping into multiple fixed income sectors that are less correlated to each other could help minimise income fluctuation. For example, extended fixed income sectors such as ABS and MBS demonstrate relatively lower correlation to HY bonds.

Conclusion
 

In uncertain times, adopting a diversified fixed income approach that integrates traditional and extended fixed income sectors could help broaden income and return opportunities while managing portfolio volatility.

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.

Diversification does not guarantee investment return and does not eliminate the risk of loss. Risk management does not imply elimination of risk. Yield is not guaranteed. Positive yield does not imply positive return.

1. Source: J.P. Morgan. Data as of 19.06.2020.
3. 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. 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.

Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current or 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.