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Written by: Nick Gartside
In an environment of strong growth, rising rates and still-low yields, the ability to invest flexibly across global bond markets is particularly valuable. But where do the opportunities lie? Nick Gartside, International Chief Investment Officer for Fixed Income and manager of the JPMorgan Global Bond Opportunities Fund, shares three ideas he and his team currently like—and two more to watch.
1. Tap into higher yields
U.S. and European high yield are supported by the robust macroeconomic backdrop and strong corporate earnings. Leverage continues to decline across both regions, while default rates are very low, and almost two-thirds of new issuance is still being used for refinancing.Valuations in both regions look attractive, but there are a couple of reasons for U.S. investors to pay particular attention to Europe. First, spreads for European high yield, at 369 basis points (bps), currently trade wider than for the U.S., at 349 bps1—an unusual condition typically seen in periods of systemic eurozone crisis. With worries over Italian politics and a possible eurozone slowdown receding, we expect the relationship to normalize.Currency is also a factor. While yields are higher for U.S. high yield in local currency terms (6.3% at the index level, vs. 3.4% for Europe), 1 dollar-based investors in the European market get a significant yield pickup through currency hedging.
2. Access niche markets
The U.S. consumer is in good health, with confidence near an 18-year high and unemployment close to a 40-year low. To tap into this strength, we like securitized credit such as pools of auto loans or credit card receivables.Broaden the borders of your bond portfolio with JPGB .
Unlike other parts of the fixed income market, this type of credit actively benefits from the rising rate environment as the securities are floating rate, with coupons resetting as yields move higher. And at around 3%,2 all-in yields look attractive on a global basis—particularly given the lack of interest rate risk.
3. Reduce your interest rate exposure
Given our expectation for monetary policy in developed markets to continue on a tightening path, we think the environment remains unfavorable for core government bonds.All-in yields are not unattractive in the U.S., with the 10-year Treasury at 3.10%,3 but real (inflation-adjusted) yields are still meager. In Europe, neither the absolute nor the inflation-adjusted picture has much to offer investors, with the 10-year German Bund yield at 0.54% and yields for 24% of the government bond market still in negative territory.3Related: A Smart Way to Navigate Today’s Markets with Factor ETFsRelated: Mid Caps Married With a Multi-Factor StrategyThe risk to our view? Any escalation in trade tensions, which have likely kept a cap on core rates this year. Conversely, though, a resolution or quietening of trade war rhetoric could propel rates higher.