Fixed income volatility requires flexible answers

Related Content Related Video White Papers Related Articles

Last week was the equivalent of the ‘flash crash’ in US Treasuries.  We saw 10-Year Treasuries move from 220 to as low as 182 then back to 215 all in one day, which is not a healthy sign.  This in combination with poor economic data coming from Europe and fundamental issues weighing on investors created a toxic mix.

Running traditional fixed income today is very much about parsing the words of central bankers, whose policies effectively control the markets. But with the Federal Reserving prolonging the day of reckoning by refusing to raise rates despite the decent economy, the ‘follow-the-Fed’ investment strategy won’t work forever.

There are myriad challenges facing bond investors currently, all of which must be navigated carefully.  The most significant issues include:

  • Yields are compressed to near all time lows across the globe, compromising the ability of fixed income to provide any total return
  • Global economic and monetary policy divergence is becoming stark.  As the US economy is recovering quite well, the desynchronisation with regions like Europe and Japan is evident. This will cause some market distortions
  • Bond market volatility is certain to increase.  Limited dealer inventories mean that liquidity is stretched, a particular problem in markets like high yield, loans and convertibles
  • Correlations across sectors of fixed income have increased in the last few years. The tighter spreads become and the lower rates go, the more that the different sectors move in lockstep. As a result, in months like September, investors do not get the benefit of diversification.

To survive the volatility that is no doubt ahead in today’s markets, investors need flexible fixed income strategies that opportunistically draw on different sources of fixed income beta, lowly correlated alpha strategies, and the systematic use of hedging to diversify sources of return. They would do well to seek bond funds with low correlation to traditional fixed income and with the ability to deliver less volatility. And, most importantly, find a bond fund that can potentially deliver strong, uncorrelated returns even in the event of an upward move in interest rates.


Bill Eigen is manager of the JP Morgan  Funds – Income Opportunities Fund

Jonathan Boyd
Editorial Director of Open Door Media Publishing Ltd, and Editor of InvestmentEurope. Jonathan has over two decades of media experience in Japan, Australia, Canada and the UK. Over the past 17 years he has been based in London writing about funds and investments. From editing the newsletter of the Swedish Chamber of Commerce in Japan in the 1990s he now focuses on Nordic markets for InvestmentEurope. Jonathan was awarded Editor of the Year at the Professional Publishers Association (PPA) Independent Publisher Awards 2017. Shortlisted for the same in 2016, he was also shortlisted in 2017 and 2015 for the broader PPA Awards category Editor of the Year (Business Media).

Read more from Jonathan Boyd

Close Window
View the Magazine

I also agree to receive editorial emails from InvestmentEurope
I also agree to receive event communications for InvestmentEurope
I also agree to receive other communications emails from InvestmentEurope
I agree to the terms of service *

You need to fill all required fields!