This is a sponsored article from J.P. Morgan Asset Management
The search for yield1 is intensifying among investors as the Federal Reserve (Fed) has indicated a readiness to begin pulling back the stimulus provided at the onset of the COVID-19 pandemic.
Fed Chair Jerome Powell has said the US central bank could begin scaling back asset purchases “as soon as the next meeting” in November 20212, and complete the process by mid-2022. US Fed officials have also revealed an inclination towards raising key interest rates.
Fixed income views for 4Q 2021
Our Global Fixed Income, Currency & Commodities (GFICC) team believes tapering will likely begin in December or January, and a full exit from the US$120 billion a month quantitative easing programme could happen within eight months. The Fed is likely to wait for a few quarters before the first rate hike, in mid-2023.
Our GFICC team holds the view this normalisation path could be “palatable” for markets even though there may be some modest upward pressure on bond yields. Importantly, the inflation trajectory over the next two years — and how far rates would rise — may determine how disruptive this round of tightening will be.
Interest rates and inflation
Although the Delta variant healthcare challenges have proven to be more material than originally hoped, and supply-side constraints are still evident and limiting growth, our GFICC team believes “above trend growth” remains the base case.
On the inflation front, while more persistent inflationary pressures are building up in some economies such as the US and the UK, and supply disruptions are pushing inflation higher for longer than expected, our GFICC team believes inflationary pressures could fade over the long term.
Capturing yield opportunities with a flexible fixed-income strategy
Our JPMorgan Income Strategy strives to create a diversified portfolio of risk premiums to deliver yield that is not correlated in day-to-day price movements1,3. We harvest high-conviction ideas across the bond universe, covering both traditional and extended sectors, delivering a wider source of income.
The global bond market has grown to about US$132 trillion4 and presents a wide range of income sources. With flexibility across sectors and geographies, our Strategy endeavours to generate consistent yield under different market conditions.
Seeking healthy yield with lower volatility than individual sectors5
US high-yield (HY) corporate bonds6 remain one of the leading sources of return, as of 31 August 20217. Fundamentals within the HY market are relatively attractive1, supported by robust growth, strong corporate earnings and declining default rate8.
We continue to be positioned in shorter duration and higher quality HY corporates. We also show preference for short duration bonds compared with long-end debt.
Another leading driver of returns is securitised assets, as of 31 August 20217. In particular, commercial mortgage-backed securities (CMBS) have been one of the leading drivers of returns supported by vaccination progress in the US, expanded mobility and travel among the general population, the continued decline in loan delinquencies and improvements in commercial real estate fundamentals.
The dynamics surrounding multi-family CMBS and the long-term demographic trends continue to support fundamentals for those properties.
We believe that yields are unlikely to move materially higher until the central banks are well into the tapering process. As such, being diversified3 and tapping into relatively attractive income and risk-adjusted return potential by investing flexibly across multiple debt markets will continue to be crucial.
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.
1. Yield is not guaranteed. Positive yield does not imply positive return.
2. ”Transcript of Chair Powell’s Press Conference”, Board of Governors of the Federal Reserve System, 22.09.2021.
3. Diversification does not guarantee investment return and does not eliminate the risk of loss.
4. Source: J.P. Morgan Asset Management, Bank for International Settlements. Data reflect most recently available as of 30.09.2021.
5. Source: Barclays Live, J.P. Morgan Asset Management. MBS refers to mortgage-backed securities, Global IG Corp bonds refers to global investment-grade corporate bonds and US Corp HY refers to US corporate high-yield bonds. Volatility is realised annualised volatility based on monthly data since the inception of JPMorgan Income Strategy. Indexes used are: Bloomberg Barclays Treasury Index, Bloomberg Barclays US MBS Index, Bloomberg Barclays Corporate Credit Index and Bloomberg Barclays US HY Index. US Corporate High Yield is based on Yield to Worst. US Treasuries, Mortgage-Backed Securities (MBS) and Global Investment Grade (IG) Corporate is based on Yield to Maturity. JPMorgan Income Strategy is based on Yield to Maturity of the underlying portfolio. Past performance is not necessarily a reliable indicator for current and future performance. Data as of 31.08.2021.
6. 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.
7. Source: J.P. Morgan Asset Management. Data as of 31.08.2021.
8. Source: J.P. Morgan Global Economic Research, J.P. Morgan Asset Management. The 30-year average default in the US stood at 3.49%, and at 2% as of end-September 2021. Default rates are defined as the par value percentage of the total market trading at or below 50% of par value and include any Chapter 11 filing, prepackaged filing or missed interest payments. The default rate is an LTM figure (last 12 months) and tracks the % of defaults over the period. Default recovery rates are as of September 2021 due to data availability.
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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. Diversification does not guarantee positive returns or eliminate risk of loss. 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.
This is a sponsored article from J.P. Morgan Asset Management