Bond Bulletin
Published: 4 days ago
The FQT research framework
Functional factors
Include macroeconomic data (such as growth and inflation) as well as corporate health figures (such as default rates, earnings, and leverage metrics).
Quantitative valuations
Is a measure of the extent to which a sector or security is rich or cheap (on both an absolute basis as well as versus history and relative to other sectors).
Technical factors
Are primarily supply and demand dynamics (issuance and flows), as well as investor positioning and momentum.
Occasionally, macroeconomic and political uncertainty causes extreme moves that destabilise financial institutions and the economy. In recent days, US assets experienced significant volatility, prompting fixed income investors to question what might stabilise the bond market if the partial reversal of the Trump administration’s policies doesn’t suffice. This week’s Bond Bulletin explores past central bank interventions, causes of the current volatility and what it means for investors.
Fundamentals
Central Banks have a mandate to promote the effective operation of the economy. One of the critical functions is to uphold the stability of the financial system and minimise and contain systemic risks. For example, in response to the Covid-19 crisis in 2020, the Federal Reserve (Fed) acted decisively to stabilise the Treasury and mortgage-backed securities (MBS) markets, initially committing to buying USD 500 billion in Treasuries and USD 200 billion in MBS, later making these purchases open ended. In its effort to support market liquidity and funding, the Fed also bolstered its USD swap lines, re-launched the Primary Dealer Credit Facility, expanded the scope of its existing repurchase agreement operations, temporarily relaxed regulatory requirements for banks and established new facilities to support the flow of credit to US corporations. More recently, in 2022, the Bank of England (BoE) intervened to protect UK financial stability following severe dysfunction in the UK government bond market. The extreme rout was triggered by the government’s unfunded fiscal statement, which exposed vulnerabilities in liability-driven investment funds. For 13 working days, the BoE purchased UK government bonds with a backstop pricing approach where dysfunction was greatest. In total, the central bank bought GBP 12.1 billion of conventional long-end gilts and GBP 7.2 billion of inflation-linked gilts, and restored market order. Importantly, the highly targeted scheme could deliver the maximum impact on financial market conditions with minimum impact on output and inflation—a key point as inflation was running above 10% in the UK at the time. Recent US asset movements have been rapid and large, but not yet extreme enough to warrant Fed intervention. Like the Fed, we will be closely monitoring bond market metrics like bid-ask spreads, market depth and relative value measures.
Quantitative valuations
Following US President Trump’s announcement of a 90-day tariff pause for non-retaliatory countries (therefore excluding China), equity markets rose, but government bond yields have yet to recover. The temporary tariff rollback is positive, but trade negotiations may be prolonged and some damage has already been done; lingering uncertainty for businesses and consumers could continue to dampen investment and consumption. We expect the Fed to maintain an easing bias amid the uncertainty. We think the inflationary impact of tariffs is more likely to be temporary than persistent because the labour market is in better balance and should continue to loosen further due to lower immigration and government cutbacks. This environment should allow the Fed to stay put and ease policy when weakness shows up in the hard activity data. With this Fed trajectory, government bond valuations look attractive as real yields – yields after allowing for inflation – remain elevated.
Government bond valuations look attractive as real yields remain elevated
Source: Bloomberg. Data as of 10 April 2025. Past performance is not indicative of future results.
Technicals
Several factors contributed to the swift bond market sell-off, although the main catalyst was the sharp decline in risk assets and ensuing volatility adjustment, prompting broad deleveraging among market participants. In particular, investors with more highly leveraged positions sought to raise cash and reduce risk to remain within Value-at-Risk limits. The footprints were clear in the government bond sector. First, US inflation-linked bonds significantly underperformed compared to nominal bonds, even as equities fell. Second, typically stable spreads, between cash Treasuries and swaps, and between cash Treasuries and bond futures, experienced sharp moves.
What does this mean for fixed income investors?
Our focus remains on enhancing portfolio protection against tail risks, with a preference for high-quality exposure. Consequently, we recommend looking for opportunities to increase duration. In particular, we remain overweight US real yields due to their attractive valuations.
About the Bond Bulletin
Each week J.P. Morgan Asset Management's Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.
Our common research language based on Fundamental, Quantitative Valuation and Technical analysis provides a framework for comparing research across fixed income sectors and allows for the global integration of investment ideas.