Global bonds: Opportunity within the turmoil - J.P. Morgan Asset Management

Global bonds: Opportunity within the turmoil

Contributor Nicholas J. Gartside

Is now a good time to invest in global bonds?

Some of them, definitely. Others, not so much. Typically, fixed income investors have two enemies—high growth and high inflation. With both absent, this represents a good environment for bond investors. However, not all bond markets and sectors will benefit equally, and this is important.

But what’s needed to capitalize on this market "inequality"?

You need two things—flexibility and deep global resources.

Because bond markets and bonds within markets don’t all move in unison, an unconstrained, flexible fixed income approach not only provides access to an enormous—and growing—global opportunity set, but can shift its exposure to wherever the greatest value can be found. With credit and interest rate risks more concentrated than ever, flexible fixed income also offers the diversification that investors need. The bottom line is there’s lots of opportunity out there at the moment, but you need the ability to fully analyze global markets and evaluate risk consistently and constantly, and you need the flexibility to go where the best value can be found.

Where is the opportunity?

There are currently two big opportunities for fixed income. The first is to allocate to those geographies where central banks are going to ease more. So that’s markets like Europe, where the European Central Bank will be much more aggressive in loosening monetary policy this year. Today, over 60% of the global bond market lies outside the US. That’s a lot of opportunity. The other area that’s a real standout is high yield corporate bonds. Outside energy, the broad selloff has allowed us to find some bargains among higher quality names, particularly in Europe.

What are the main issues and risks to be aware of going forward?

Given concerns over slowing global growth, we are wary of the emerging markets. Commodity prices remain under pressure and the on-again, off-again specter of further rate rises in the US increases the risk of an emerging market crisis. The stronger dollar is also having an impact on emerging markets. However, while we expect the dollar to continue to strengthen, we aren’t taking on specific foreign currency risk. Finally, market liquidity is a constant factor in our thinking. But, again, a flexible approach and a constant eye on risk helps to avoid the vulnerable countries and sectors that benchmark-constrained approaches may not be able to.

Investment Implication: How should you add global bonds to a portfolio?

In this environment, it’s especially crucial for bond investors to be appropriately diversified across core, core complement and extended fixed income sectors that add potential for gains and increase income. Global bonds fall into the extended sector. Be agnostic to country and sector and look at opportunities across the $100 trillion market.

Investments in bonds and other debt securities will change in value based on changes in interest rates. If rates rise, the value of these investments generally drops.

International investing involves a greater degree of risk and increased volatility due to political and economic instability of some overseas markets. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can affect returns.

Securities rated below investment grade are considered "high-yield," "non-investment grade," "below investment-grade," or "junk bonds." They generally are rated in the fifth or lower rating categories of Standard & Poor's and Moody's Investors Service. Although these securities tend to provide higher yields than higher rated securities, they tend to carry greater risk.

Generally, when the value of the U.S. dollar rises in value relative to a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Currency markets generally are not as regulated as securities markets, and currency exchange rates may fluctuate significantly over short periods of time.

Related funds

Global Bond Opportunities Fund
Broaden the borders of your bond portfolio. The Fund provides flexible, high-conviction exposure across more than 15 fixed income sectors and 50 countries.
Strategic Income Opportunities Fund
Complement your core. With an absolute-return-oriented approach to fixed income investing, invests flexibly across a diverse set of fixed income strategies, taking advantage of the best opportunities across all market environments.
Core Bond Fund
Quality at the core. A value-driven approach that emphasizes intermediate bonds of the highest quality, the Fund serves as a foundation for investors seeking a well-diversified portfolio.