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The normalisation of monetary policy happens during times of major change in bond markets that we think may require investors to rethink their fixed income allocation and consider a flexible and diversified approach. We believe investors need to rethink fixed income around five themes. These themes will further emphasise investor needs and how to meet them.
Five themes face investors in the Fixed Income market, which may require them to adapt their investment portfolio to suit the market and make the most of the opportunities, while mitigating the risk of the challenges affecting their investment yields.
Synchronised global growth is leading to a gradual removal of the monetary policy accommodation. Different scenarios could emerge based on a possible pick-up in growth (US fiscal policy) or inflation (wage pressure in the US, tariffs).
Normalisation of monetary policy is underway: The Fed is reducing the balance sheet and rising rates, while the ECB will end the quantitative easing programme in 2018. These Central Bank (CB) “asynchronies” may open opportunities for active investors.
Active investors could play yield differentials, moves in yield curves and in currency rates, driven by the end of easy money and Central Banks’ actions.
Source: Amundi Research, Bloomberg data. As of 13 April 2018.
Looking at the past, drawdowns in the US Aggregate Index occurred ahead of, or during Fed hike cycles, with differences due to several factors such as the pace and extent of rate hikes, yields or duration. An active approach can help to target total return.
Accommodative monetary policy has led to increased issuance with extended maturities. As a result, duration stands at all-time highs both in the US and Europe.
Source: Amundi analysis on Bloomberg data. Data Refers to Bloomberg Barclays Euro and US Aggregate Bond Index, as of 30 March 2018.
Spreads on investment grade credit remain below long-term average and quite tight especially when taking into account the evolution in credit quality.
After a period of general spread compression, we expect to enter into a more volatile and disperse environment that could favour active investing.
Source: Amundi analysis on Bloomberg data, IMF Financial stability report October 2017. Data refers to BofAML investment grade corporate index by area: US = ICE BofAML US Corporate Index, Euro Area = ICE BofAML Euro Corporate Index, Global = ICE BofAML Global Large Cap Corporate Index. Data as of 31 March 2018.
Post crisis changes in regulations have resulted in a reduction in broker-dealer and bank activity in some areas of the market. For example in the US, the credit market size has continued to rise, while dealer inventory has remained unchanged. This could result in a lower potential to absorb liquidity demand during periods of turmoil (when bid-ask spreads tend to widen).
Source: Amundi analysis on Bloomberg, Federal Reserve Bank of New York, BofA Merrill Lynch, Marketaxess data (http://www.marketaxess.com/research/basi/index.php). Data as of 4 April 2018. The US market size is the sum of the $ IG (C0A0) and HY (H0A0) cash indices face value.
Historically, treasuries and high quality bonds have contributed to mitigating the downside during equity bear markets, but investors should be aware that the bond ability to absorb shocks, due to the low level of rates/spreads, could be lower in a rising rate environment.
While bonds remain a key source of diversification in a multi-asset portfolio, investors should be aware that correlations are not stable and further diversification may be required in this period of transition in monetary policy.
Source: Bloomberg. Data as of 30 March 2018. US Treasury 10-15 years, US HY = ICE BofAML US High Yield, EM Bond = JPMorgan EMBI Global Diversified Composite, US Aggregate = Bloomberg Barclays US Aggregate Bond Index, US Equity = S&P500 Index. All indices are total return in LC. Note that these are examples only and there can be no assurance of future events.
Income, capital preservation, total return and diversification within an overall multi-asset allocation are among the key goals that investors seek through their core fixed income allocation. While a prolonged period of low volatility and CB easing has benefited a wide range of bond investment strategies, as we enter a new phase of less accommodative policies, not all of these goals will be achievable within a unique investment strategy. Thus, investors should carefully assess their primary objectives in the search for their most appropriate core bond allocation strategy. In our view, a way to target investor specific goals could be by combining a well-diversified and flexible core bond allocation with specific building blocks designed to target a specific goal.
Discover our range of Fixed Income solutions that offer a flexible, diversified approach to Fixed Income, that are managed by teams of active, highly experienced investment professionals.
Seeks the best investment opportunities across global, government bond, corporate credit, emerging markets and currency markets through an active and flexible approach. A full cycle product able to switch from one asset class to another, seeking to find value wherever it exists; while having an active approach to managing Portfolio risk budgets, in order to reduce Portfolio volatility.
The Portfolio’s unconstrained, multi-sector approach aims to offer investors a solution to finding yields. The Portfolio further aims to protect against the downside risks of rising interest rates and negative bond returns, whilst seeking to maintain low levels of volatility.
Amundi Funds Bond Global High Yield seeks an attractive total return by combining the interest income of high yield bonds with capital appreciation. The Sub-Fund invests at least two thirds of its assets in bonds rated high yield (Ba/BB to Caa/CCC) by the two primary bond rating agencies, Moody’s and S&P.
An Opportunistic Core fixed income strategy investing in a wide range of fixed income sectors with the goal of achieving competitive returns as compared to a traditional higher quality US core fixed-income portfolio – but without excessive additional volatility.
The Portfolio believes that a value-oriented, total return, risk-managed approach to fixed income investing should produce competitive performance. The Portfolio integrates top-down views and risk management with a bottom-up valuation process. Within the ultra-short duration universe, the fund seeks a high quality, multi-sector approach that invests in three distinct, diversified pools of risk.
Diversification does not guarantee a profit or protect against loss.