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Are bonds back as inflation hits the high notes?

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J.P. Morgan Asset Management

This is a sponsored article from J.P. Morgan Asset Management.

The macro backdrop

Higher inflation, rising rates, tighter financial conditions and consumer fatigue could weigh on economic growth. Supply bottlenecks are expected to persist well into 2023 while commodity and wage inflationary pressures are likely to stay elevated1.

This suggests that the Federal Reserve is poised to raise interest rates further to curtail inflation, although the growth pinching effects of tighter monetary policy could lead to a reassessment of the fundamental backdrop.

Where we see opportunities2

In the current environment, we believe it is crucial to employ an unconstrained and flexible approach to differentiate and invest where opportunities can be found. As market conditions evolve, allocating across the full fixed income spectrum2 – traditional assets such as government and investment-grade (IG) bonds as well as non-traditional assets such as securitised credit3 and high-yield4 (HY) corporate bonds – can help build a resilient and diversified portfolio.

Source: J.P. Morgan Asset Management. This information is provided for illustrative purposes only. Information shown is based upon market conditions at the time of the analysis and is subject to change. Not to be construed as Investment recommendation.

Investors should consider how they allocate to each fixed income market segment as the difference in drivers of return, sensitivity to interest rate movements and corporate fundamentals will affect returns. Having the flexibility to move between sectors may be advantageous.

  1. Duration positioning5

    In fixed income investing, duration is a gauge of interest rate risk, showing how bond prices and yields will likely change when rates move. Generally, longer duration bonds may suffer more price decline in response to a rise in interest rates. Therefore, duration positioning has served both as a risk management6 tool as well as a source of alpha.

    We prefer high quality, short-duration bonds and believe government bonds can be a place to add duration1. Yields on 10-year US Treasuries more than doubled this year, as of 1 September 2022, and should offer some flight-to-quality benefits at a yield above 3%1.

  2. Corporate credit

    IG corporate bonds would arguably be better suited for investors that are more concerned about economic slowdown, or even a recession. Given an US economic slowdown would prompt US Treasury yields to decline, boosting bond prices, we believe IG bonds could benefit from the trend. Since investors are unlikely to completely sell down their equity allocation, nor should they, the IG corporate debt could provide diversification for the overall portfolio construction.

    Even though credit valuations have increased, an active bottom-up evaluation across sectors such as HY4 is crucial in the current market environment. The fundamentals and valuations within the HY market continue to look attractive on a go-forward basis as corporate earnings remain robust in general. Yields have reset higher, US-dollar prices in many cash bonds are trading below par, the level of distressed debt remains low, and the HY default rate has also remained low.

  3. Securitised assets3

    We continue to have a favourable view on dynamics surrounding multi-family commercial mortgage-backed securities. 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.

    Asset-backed securities continue to be buoyed by well-supported US consumer fundamentals, while non-agency mortgage-backed securities continue to be supported by the strength of both the US housing market and the US consumer.

Conclusion

As markets evolve, it is crucial to employ an unconstrained and flexible approach to differentiate and invest where opportunities can be found – with a particular focus on seeking quality and higher yielding allocation ideas.
 


As of 07/2022. This information is based on current market conditions, subject to change from time to time without prior notice.
Provided to illustrate macro and asset class trends, not to be construed as research or investment advice. Investments are not similar or comparable to deposits. Investors should make independent evaluation and seek financial advice. Risk management does not imply elimination of risks. Forecasts/ Estimates may or may not come to pass.

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. Source: J.P. Morgan Asset Management, “Global Fixed Income Views 3Q 2022”, 13.06.2022.
2. 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.
3. 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.
4. Investments in below investment-grade or unrated debt securities, may be subject to higher liquidity risks and credit risks comparing with investment-grade bonds, with an increased risk of loss of investment.
5. 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.
6. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.

Important Information
For Professional Investors and Financial Intermediaries only.

This advertisement or publication has not been reviewed by the Monetary Authority of Singapore and the Securities and Futures Commission in Hong Kong. Investments are not comparable or similar to deposits. Investment involves risk, value of investments may rise or fall including loss of any or all of the amount invested. Not all investment ideas are suitable for all investors. Past performance is not indicative of current or future performance. Investors should make their own evaluation or seek independent advice before investing. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not be taken as or constructed as research or investment advice. Issued in Singapore by JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K) and in Hong Kong by JPMorgan Funds (Asia) Limited. All rights reserved.

J.P. Morgan Asset Management

This is a sponsored article from J.P. Morgan Asset Management.

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