Taking flight with fixed income as inflation stays high
We share our views on the fixed income themes and opportunities in current choppy markets.
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#HighYieldCredit #MultiAsset #IncomeInvesting
Key takeaways:
- Amid an era of low and negative rates, we see income opportunities in high-yield (HY) credit1, as part of our overall portfolio, as we go across different asset classes in the search for yield.
- Active management is key in the search for potential HY income opportunities1.
The pursuit of income is a continuous journey. Over the past decade, income investors like us have stayed the course, employing an active investing approach as we navigate the markets’ ups and downs.
With interest rates at low levels, or negative, active management, which integrates macro views and the bottom-up, yield-focused insights of asset class specialists, is crucial in tapping into income opportunities as market conditions evolve.
Exploring high-yield potential in the overall portfolio1
The global economic recovery continues but the bright spots are currently the US and Europe. Asia could be next if vaccination rates increase, facilitating the reopening of economies and borders. The Federal Reserve is on track to begin winding down its asset purchase programme by the end of 2021, while other central banks could also consider rolling back emergency measures.
Still, rates have stayed low alongside rising inflation2.
Government bond yields and expected inflation2
2. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. 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. Source: J.P. Morgan Asset Management; (Left) FactSet, Tullett Prebon; (Right) Bloomberg Finance L.P. *Data begins, and averages calculated from, 01.01.1970 for US Treasuries, 02.10.1972 for German Bunds and 03.02.1986 for Japanese Government Bonds. Past performance is not a reliable indicator of current and future results. Positive yield does not imply positive return. Data reflect most recently available as of 30.09.2021.
- Fixed income covers a wide range of sectors. In addition to traditional fixed income such as government bonds and investment-grade corporate bonds, there are extended sectors such as high-yield corporate bonds.
- As different bonds react differently to market changes, the key to a diversified fixed income portfolio is to include assets which have low or even negative correlations1.
- Employing a flexible approach can help identify high-conviction investing ideas. As part of an overall portfolio and based on investors’ objectives and risk appetite, fixed income assets with high-yielding potential like HY bonds continue to be a relatively attractive source of income, as illustrated in the chart3 below. For example, European HY bonds can present potential diversification benefits as they are generally of higher quality and have shorter duration.
Global fixed income: yields and duration3
3. Provided to illustrate macro trends, not to be construed as research or investment advice. Investments involve risks and are not similar or comparable to deposits. Not all investments are suitable for all investors. Source: Barclays, Bloomberg Finance L.P., FactSet, ICE BofA Merrill Lynch, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Based on Bloomberg Barclays US Aggregate Credit – Corporate Investment Grade Index (US IG), Bloomberg Barclays Euro Aggregate Credit – Corporate (Europe IG), J.P. Morgan Asia Credit Investment Grade Index (Asia IG), Bloomberg Barclays Global Aggregate – Corporate (Global IG), Bloomberg Barclays US Aggregate Credit – Corporate High Yield Index (US HY), Bloomberg Barclays US Aggregate Securitized – Asset Backed Securities (US ABS), Bloomberg Barclays Pan European High Yield (Europe HY), J.P. Morgan Asia Credit High Yield Index (Asia HY), ICE BofA Global High Yield (Global HY), J.P. Morgan GBI-EM (Local EMD), J.P. Morgan EMBI Global (USD EMD), J.P. Morgan Asia Credit Index (JACI) (USD Asia Credit), J.P. Morgan Asia Credit China Index (USD China Offshore Credit). 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. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. Yields are 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 30.09.2021.
Why we are considering high yield credit?
- We believe HY bonds currently present attractive opportunities for diversified portfolios. Coupons continue to be a key source of return for US and European HY corporate debt even with tight credit spreads and rich valuations.
1. US default rate has declined
- US defaults have slowed, with the default rate at 0.9%, as of end-September 20214, from the 10-year average of 2.3%. Default projections for 2021 remain modest4.
- Active management, which integrates macro views and the bottom-up, yield-focused insights of asset class specialists, is crucial in tapping quality income opportunities.
2. Attractive yield potential
- HY credit spreads5 narrowed to about 385 basis points, as of end-September 2021, from the 10-year average of 524 basis points4.
US HY bonds4
4. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. 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. Source: J.P. Morgan Economics Research, J.P. Morgan Asset Management. *Default rate is defined as the percentage of the total market trading at or below 50% of par value and includes any Chapter 11 filing, pre-packaged filing or missed interest payments. Spreads indicated are benchmark yield-to-worst less comparable maturity Treasury yields. **Data reflects 20-year average and is as of 31.12.2020. US corporate high yield is represented by the J.P. Morgan Domestic High Yield Index. Data reflect most recently available as of 30.09.2021.
Conclusion
As rates continue to stay low, interest in HY bonds continues to gain traction. We look out for opportunities in HY bonds from an asset allocation perspective.
Provided for information only based on market conditions as of date of publication, not to be construed as investment recommendation or advice.
High-yield credit refers to corporate bonds which are given ratings below investment grade and are deemed to have a higher risk of default. Yield is not guaranteed. Positive yield does not imply positive return. Diversification does not guarantee investment return and does not eliminate the risk of loss.
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.
5. Spreads refer to the interest rate differential between two different types of bonds.
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