Bunds most volatile since taper tantrum

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Bill Eigen, fund manager at JP Morgan Funds – Income Opportunity Fund comments on the recent hike of Bund yields.

As recent European inflation data shows firming prices, volatility has followed across the European rates market. The spike in 10 Year German Bund yields from 18 basis points to over 50 basis points in a short period – during which investors would have lost more than 10% in total return terms – is an illustration of the bond market’s extreme susceptibility to slight interest rate movements.

In what is arguably the most volatile market since the 2013 taper tantrum, it’s critical for investors to seek uncorrelated sources of return that can offer capital preservation and steady, coupon like returns whilst protecting against drawdowns.

From this absolute return investment perspective, some of our recent investment themes include:

• We tactically allocated into credit risk as spreads widened. We increased our exposure to less interest rate sensitive high yield debt and added exposure to mortgage credit. We sought alpha from the credit relative value (long/short) and alternative credit sleeves of our portfolio
• Within our high yield exposure, we capitalised on opportunities generated by the weakness in the energy sector, which has suffered from the oil price halving since the middle of last year. We were relatively shielded from energy related volatility last year due to our conservative stance on credit overall and energy specifically. We’ve recently added to our allocation to energy on a selective basis
• We actively sought to capitalise on European credit opportunities in the alternative credit sleeve of the portfolio, primarily via dislocations in synthetic indices

In today’s market, traditional fixed income approaches may be significantly challenged if deployed on their own, without diversification. Investors would be wise to focus on stability, reducing the likelihood of capital losses and preserving capital. We stand ready to capitalise on further volatility, which we would expect to continue.

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