Combatting bond market volatility with global diversification

12-4-2019

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​Nick Maroutsos, Co-Head of Global Bonds, explains why it is important to focus on quality bonds in periods of potential bond market volatility.  

The backdrop for global interest rates has changed significantly since last autumn, but that does not mean risks for bond investors have diminished. While the threat posed by interest rates may have subsided, an extended credit cycle, weakening corporate profitability and myriad geopolitical risks are all factors that could potentially spell upheaval for bond markets. Possibly aggravating the situation are real yields having reset to a higher level, which – as we saw in 2018 – can be an ingredient for increased market volatility.

But with real yields at the end of March 2019 back below 1% in the US and negative across much of the developed world, bond investors still face the challenge of generating sufficient income. Consequently, we again find ourselves in an environment in which a fixed income strategy must work harder to find risk-adjusted return opportunities. This challenge, in our view, is most acute within core bond strategies, especially in regions where benchmark rates hover near 0%. We believe one tactic that merits consideration under such conditions is increasing one’s allocation to short-duration strategies not tethered to traditional bond benchmarks. The combination of greater flexibility in calibrating duration and credit exposure, along with the potential for geographical diversification, may help a portfolio to absorb another round of elevated market volatility. And given the risk factors delineated above, such an eventuality would not surprise us.

Not your parent’s duration

With last autumn’s concerns about wage-driven inflation a distant memory and the yield on 10-year US Treasury bonds now back below 2.5%, one may be tempted to increase duration. Reinforcing this view is the US Federal Reserve (Fed) dialling back expectations for a 2019 rate increase and inferring that it would likely cease its balance sheet reduction programme. We are not alone in expecting the Fed’s next move to be a rate cut. The re-emerging dovish bias of global central banks is further illustrated in the European Central Bank’s (ECB) recent decision to introduce a new round of loans to financial institutions.

Despite these temptations, we see little upside in increasing exposure to longer-dated bonds. Our caution is based on the current shape of the US Treasuries yield curve, which is the flattest it has been in the post Global Financial Crisis era, as measured by the spread between the 2-year and 10-year notes. With this term structure, we see little incremental advantage to be gained per unit of risk when extending maturities.

Chart 1: Flattening US Treasury yield curve

The recent yield curve inversion means that US Treasury bills up to 1-year in maturity yield more than many longer-dated notes, but with lower duration risk.

 

Source: Bloomberg, as at 27 March 2019.

When comparing the Bloomberg Barclays US Aggregate Bond Index with the Bloomberg Barclays 1 to 3 Year Government/Credit Index, the latter’s yield to worst – at 2.43% – offers 84% of the yield of the broader index with only 33% of its interest rate risk as measured by modified duration (see chart 2). In short, investors are not being sufficiently compensated for taking on additional risk.

Chart 2: Yield-to-worst and duration of core bond market segments

At this juncture, we see little incremental advantage to be gained per unit of risk when extending maturities.

 

Source: Bloomberg, as at 26 March 2019. Note: Duration is a measure of sensitivity of a bond price to changes in interest rates. Yield-to-worst represents the lowest yield that an investor can receive on a bond without the issuer defaulting.

Furthermore, with the Fed’s next move likely to be an interest rate cut, we believe that the front end of the curve has greater room to rally than longer-dated securities. Given the low yields on longer-dated government debt, especially in the eurozone, UK and Japan, we see little impetus for prices on these maturities to rise, unless one believes we are on the cusp of a global recession – a potential outcome that has likely decreased due to the recent dovish pivot by the Fed and the ECB.

Not out of the woods – by any means

A low-growth, low-inflation environment at first glance may appear conducive for bonds. Unfortunately, it is occurring during an extended credit cycle in which riskier assets appear richly valued: after last autumn’s spike, the spread on both investment-grade and high-yield corporate credits and their risk-free benchmarks have returned to levels well below their post-crisis average. Should central bank – and market – prognostications of slower economic growth come to fruition, the highly levered balance sheets of the corporate sector may come under pressure as revenue growth slows. A potential warning sign is aggregate revenue growth of the S&P 500 Index component companies only reaching 6%, year over year, in the fourth quarter of 2019.

A global opportunity set

With interest rates low, however, credit becomes an ever more important factor in generating sufficient yields. Here, too, a greater reliance on an unconstrained strategy may help investors achieve their objectives. While elevated corporate debt levels are prevalent in the US, and Europe is flirting with recession, there are compelling credit stories in other regions that can be accessed when stepping away from regional benchmarks. These stories often encompass robust secular themes such as the growth of banking in emerging Asia and infrastructure spending – often government backed – in several regions. An unconstrained approach allows investors to avoid, rather than just underweight, segments of a benchmark – either a sector or a region – that may be structurally challenged.

Last autumn, we highlighted the need for focusing on regions where monetary authorities were likely to pause, or even cut, interest rates. The US now fits into that camp. Yet, a flat Treasuries curve dissuades one from holding longer-dated duration in the US. So too does the country’s involvement in the ongoing trade spat with China and the political risk emanating from Washington. Other countries, in our view, offer similar interest rate profiles with considerably less baggage.

With an eye toward volatility

Last autumn’s volatility – after an extended period of tranquillity – served as a reminder for bond investors that capital preservation is no sure thing. Our greatest concern remains market liquidity. While late 2018 may have caught investors’ attention, the post-crisis market-clearing infrastructure has yet to be truly tested. Given the array of risks in the marketplace, any number of scenarios could lead to a liquidity event in which price dislocations are pronounced. Therefore, investors must remain on high alert for signs of potential market stress. In addition to monitoring liquidity, we believe sufficient respect must be paid to traditional volatility metrics such as interest rate volatility, credit default swap pricing and foreign currency movements. The latter takes on elevated importance as exposure to foreign currency-denominated securities increases.

Vigilance with regard to these metrics may give investors the advanced notice needed to dampen portfolio volatility, but portfolio construction may also further the cause. In an environment marked by low growth and high debt, and with central banks remaining a swing factor in markets, a globally diversified portfolio can help moderate volatility by targeting maturities, regions and issuers with the most attractive risk-adjusted return profiles, while avoiding those where the risk asymmetry is too great.

Dit zijn de visies van de auteur op het moment van publicatie en die kunnen afwijken van de visies van andere personen of teams bij Janus Henderson Investors. De genoemde effecten, fondsen, sectoren en indices in dit artikel vormen geen (deel van een) aanbod of verzoek om die effecten te kopen of te verkopen.

Resultaten behaald in het verleden vormen geen garantie voor de toekomst. Alle performancegegevens omvatten inkomsten- en kapitaalwinsten of verliezen maar geen doorlopende kosten en andere fondsuitgaven.

De informatie in dit artikel mag niet worden beschouwd als een beleggingsadvies.

Voor promotiedoeleinden.


Belangrijke informatie

Lees de volgende belangrijke informatie over fondsen die vermeld worden in dit artikel.

Janus Henderson Absolute Return Income Fund

For institutional/ sophisticated investors / accredited investors qualified distributors use only.

All content in this document is for information or general use only and is not specific to any individual client requirements. The information contained in this document is referential and may not be construed as an offer, invitation or recommendation or investment advice, nor should be taken as a basis to take (or stop taking) any decision.

Janus Henderson Capital Funds Plc is a UCITS established under Irish law, with segregated liability between funds. Investors are warned that they should only make their investments based on the most recent Prospectus which contains information about fees, expenses and risks, which is available from all distributors and paying agents, it should be read carefully. An investment in the fund may not be suitable for all investors and is not available to all investors in all jurisdictions; it is not available to US persons.  Past performance is not indicative of future results. The rate of return may vary and the principal value of an investment will fluctuate due to market and foreign exchange movements.  Shares, if redeemed, may be worth more or less than their original cost.

Janus Henderson Group plc and its subsidiaries are not responsible for any unlawful distribution of this document to any third parties, in whole or in part, or for information reconstructed from this document and do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regards to the results obtained from its use. As with all investments, there are inherent risks that each individual should address.

The distribution of this document or the information contained in it may be restricted by law and may not be used in any jurisdiction or any circumstances in which its use would be unlawful.

Issued in Europe by Janus Capital International Limited (“JCIL”), authorised and regulated by the U.K. Financial Conduct Authority. Janus Capital International Limited (“JCIL”) is an entity registered and operating under the laws of the United Kingdom and Janus Capital Funds plc. is registered under the legislation of Ireland.

The extract prospectus (edition for Switzerland), the articles of incorporation, the extract annual and semi-annual report, in German, can be obtained free of charge from the representative in Switzerland: First Independent Fund Services Ltd (“FIFS”), Klausstrasse 33, CH-8008 Zurich, Switzerland, tel: +41 44 206 16 40, fax: +41 44 206 16 41, web: http://www.fifs.ch. The Swiss paying agent is: Banque Cantonale de Genève, 17, quai de l’Ile, CH-1204 Geneva. The last share prices can be found on www.fundinfo.com. For Qualified investors, institutional, wholesale client use only. Outside of Switzerland, this document is for professional use only. Not for onward distribution.

This presentation is strictly private and confidential and may not be reproduced or used for any purpose other than evaluation of a potential investment in Janus Capital International Limited’s products or the procurement of its services by the recipient of this presentation or provided to any person or entity other than the recipient of this presentation.

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Janus Capital Management LLC serves as investment adviser. Janus, Intech and Perkins are registered trademarks of Janus International Holding LLC. © Janus International Holding LLC. For more information or to locate your country’s Janus representative contact information, please visit www.janushenderson.com.

Specifieke risico's

  • Dit fonds is ontworpen om slechts als één component van meerdere te worden gebruikt in een gediversifieerde beleggingsportefeuille. Beleggers moeten zorgvuldig het deel van hun portefeuille dat in dit fonds is belegd, overwegen.
  • ​Een emittent van een obligatie (of geldmarktinstrument) kan niet in staat of niet bereid zijn om rente te betalen of kapitaal terug te betalen aan het fonds. Als dit gebeurt of de markt ziet dat dit kan gebeuren, zal de waarde van de obligatie dalen.
  • Het fonds kan derivaten gebruiken om zijn beleggingsdoelstelling te bereiken. Dit kan resulteren in 'een hefboomwerking', wat een beleggingsresultaat kan vergroten en winsten of verliezen voor het fonds kunnen groter zijn dan de kosten van het derivaat. Derivaten brengen ook andere risico's met zich mee, in het bijzonder dat een tegenpartij van een derivaat, zijn contractuele verplichtingen misschien niet nakomt.
  • Als het fonds activa aanhoudt in andere valuta dan de basisvaluta van het fonds of u belegt in een aandelenklasse van een andere valuta dan het fonds (tenzij 'afgedekt'), kan de waarde van uw belegging beïnvloed worden door wisselkoersschommelingen.
  • Wanneer de rente stijgt (of daalt), zullen de prijzen van verschillende effecten anders worden beïnvloed. In het bijzonder dalen de obligatiewaarden doorgaans wanneer de rentetarieven stijgen. Dit risico is over het algemeen groter naarmate de looptijd van een obligatie-investering langer is.
  • Effecten binnen het fonds kunnen moeilijk te waarderen of te verkopen zijn op een gewenst tijdstip en op een bepaalde prijs, vooral in extreme marktomstandigheden waarin de prijzen van activa kunnen dalen, waardoor het risico van beleggingsverliezen toeneemt.

Risicoklasse

SRRI 2

Janus Henderson Absolute Return Income Opportunities Fund

For institutional/ sophisticated investors / accredited investors qualified distributors use only.

All content in this document is for information or general use only and is not specific to any individual client requirements. The information contained in this document is referential and may not be construed as an offer, invitation or recommendation or investment advice, nor should be taken as a basis to take (or stop taking) any decision.

Janus Henderson Capital Funds Plc is a UCITS established under Irish law, with segregated liability between funds. Investors are warned that they should only make their investments based on the most recent Prospectus which contains information about fees, expenses and risks, which is available from all distributors and paying agents, it should be read carefully. An investment in the fund may not be suitable for all investors and is not available to all investors in all jurisdictions; it is not available to US persons.  Past performance is not indicative of future results. The rate of return may vary and the principal value of an investment will fluctuate due to market and foreign exchange movements.  Shares, if redeemed, may be worth more or less than their original cost.

Janus Henderson Group plc and its subsidiaries are not responsible for any unlawful distribution of this document to any third parties, in whole or in part, or for information reconstructed from this document and do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regards to the results obtained from its use. As with all investments, there are inherent risks that each individual should address.

The distribution of this document or the information contained in it may be restricted by law and may not be used in any jurisdiction or any circumstances in which its use would be unlawful.

Issued in Europe by Janus Capital International Limited (“JCIL”), authorised and regulated by the U.K. Financial Conduct Authority. Janus Capital International Limited (“JCIL”) is an entity registered and operating under the laws of the United Kingdom and Janus Capital Funds plc. is registered under the legislation of Ireland.

The extract prospectus (edition for Switzerland), the articles of incorporation, the extract annual and semi-annual report, in German, can be obtained free of charge from the representative in Switzerland: First Independent Fund Services Ltd (“FIFS”), Klausstrasse 33, CH-8008 Zurich, Switzerland, tel: +41 44 206 16 40, fax: +41 44 206 16 41, web: http://www.fifs.ch. The Swiss paying agent is: Banque Cantonale de Genève, 17, quai de l’Ile, CH-1204 Geneva. The last share prices can be found on www.fundinfo.com. For Qualified investors, institutional, wholesale client use only. Outside of Switzerland, this document is for professional use only. Not for onward distribution.

This presentation is strictly private and confidential and may not be reproduced or used for any purpose other than evaluation of a potential investment in Janus Capital International Limited’s products or the procurement of its services by the recipient of this presentation or provided to any person or entity other than the recipient of this presentation.

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Janus Capital Management LLC serves as investment adviser. Janus, Intech and Perkins are registered trademarks of Janus International Holding LLC. © Janus International Holding LLC. For more information or to locate your country’s Janus representative contact information, please visit www.janushenderson.com.

Specifieke risico's

  • Een deel van de of de volledige jaarlijkse managementkosten en andere kosten van het fonds kunnen uit het kapitaal gehaald worden, waardoor het kapitaal kan eroderen of de potentie voor kapitaalgroei kan verlagen.
  • Dit fonds is ontworpen om slechts als één component van meerdere te worden gebruikt in een gediversifieerde beleggingsportefeuille. Beleggers moeten zorgvuldig het deel van hun portefeuille dat in dit fonds is belegd, overwegen.
  • Als een fonds een hoge blootstelling aan een zeker land of zekere geografische regio heeft, draagt het fonds een hoger risiconiveau dan een fonds dat breder gevarieerd is.
  • ​Een emittent van een obligatie (of geldmarktinstrument) kan niet in staat of niet bereid zijn om rente te betalen of kapitaal terug te betalen aan het fonds. Als dit gebeurt of de markt ziet dat dit kan gebeuren, zal de waarde van de obligatie dalen.
  • Het fonds kan derivaten gebruiken om zijn beleggingsdoelstelling te bereiken. Dit kan resulteren in 'een hefboomwerking', wat een beleggingsresultaat kan vergroten en winsten of verliezen voor het fonds kunnen groter zijn dan de kosten van het derivaat. Derivaten brengen ook andere risico's met zich mee, in het bijzonder dat een tegenpartij van een derivaat, zijn contractuele verplichtingen misschien niet nakomt.
  • ​Opkomende markten stellen het fonds bloot aan hogere volatiliteit en een groter risico op verlies dan ontwikkelde markten; ze zijn vatbaar voor ongunstige politieke en economische gebeurtenissen en kunnen minder goed worden gereguleerd met minder robuuste bewarings- en afwikkelingsprocedures.
  • Als het fonds activa aanhoudt in andere valuta dan de basisvaluta van het fonds of u belegt in een aandelenklasse van een andere valuta dan het fonds (tenzij 'afgedekt'), kan de waarde van uw belegging beïnvloed worden door wisselkoersschommelingen.
  • ​Het fonds belegt in hoogrentende (niet van beleggingskwaliteit) obligaties en hoewel deze doorgaans hogere rentetarieven bieden dan obligaties van beleggingskwaliteit, zijn ze meer speculatief en gevoeliger voor ongunstige veranderingen in de marktomstandigheden.
  • Wanneer de rente stijgt (of daalt), zullen de prijzen van verschillende effecten anders worden beïnvloed. In het bijzonder dalen de obligatiewaarden doorgaans wanneer de rentetarieven stijgen. Dit risico is over het algemeen groter naarmate de looptijd van een obligatie-investering langer is.
  • Effecten binnen het fonds kunnen moeilijk te waarderen of te verkopen zijn op een gewenst tijdstip en op een bepaalde prijs, vooral in extreme marktomstandigheden waarin de prijzen van activa kunnen dalen, waardoor het risico van beleggingsverliezen toeneemt.

Risicoklasse

SRRI 5

Deel

Attentie