AB’s Taylor: A better bond blueprint?

John Taylor (pictured), portfolio manager Fixed Income at AB argues that bond strategies based on benchmark indices have big limitations and could expose investors to an unattractive mix of investment risks. He questions whether there could be a better blueprint for global bond investors.

“Going global” in fixed income should enable investors to dramatically expand their opportunity sets. And adding more markets and issuers to portfolios should secure valuable diversification benefits.

But tracking the core global bond benchmark index, the Barclays Global Aggregate Bond Index (or Agg), could leave investors both under-diversified and overexposed to US interest rates. The Agg has grown more sensitive to interest rates as bond yields have plummeted and the world awaits a liftoff in US rates. In our view, the index isn’t yielding enough to compensate investors for the greater interest-rate risks they’re taking.

In addition, the current make-up of the Agg raises big questions about whether it provides dependable diversification from equity-market volatility.

How to go global?

As a market-weighted index, the Agg reflects bond issuance levels—a poor guide to intrinsic value. Tracking the Agg guarantees a portfolio that’s about 40% concentrated in a combination of US Treasuries, US mortgage-backed securities and Japanese government bonds (JGBs).

JGBs are a good example of the potential pitfalls posed by some big index constituents. The Bank of Japan’s quantitative easing (QE) bond-buying program has driven JGB yields down so far that they’re now some of the lowest in the world. This suggests they’re very poorly placed to offset the impact of a potential Japanese “taper tantrum” when the Bank of Japan eventually brings QE to a close.

Mona Dohle
Mona Dohle speaks German and Dutch, she is DACH & Benelux Correspondent for InvestmentEurope. Prior to that, she worked as a journalist in Egypt and Palestine. She started her career as a journalist working for a local German newspaper. Mona graduated with an MSc in Development Studies from SOAS and has completed the CISI Certificate in International Wealth and Investment Management.

Read more from Mona Dohle

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