By Iain Stealey, fund manager, JPM Global Bond Opportunities Fund
If the past 30 years has been a one-way traffic for bond investors, the last six months have been anything but. Once perceived as dull if dependable shock absorbers for a portfolio, and a place to land when equities fall, bonds are recalibrating to a more volatile norm.
As Draghi warned investors earlier this summer, it’s time to get used to turbulence. For evidence of this, we need only look at the German 10 year bund’s worst 48 hours since the Euro inception recently.
In all of this, it is important to remember that higher volatility doesn’t limit the prospects for making money in bonds – in fact, in some ways it actually expands the opportunity set. What it does require is a strategic, unconstrained investment approach. Let’s consider what that means for investors in practical terms.
Taking a step back to review the macro outlook, we have a few factors at work driving global bond markets towards what we think is an interesting inflection point. In April, investors seemed to awaken to the realisation that a yield of .04% on German 10 year bunds was far too low, releasing the pressure valve to send yields soaring back up.
That in turn saw the sharp retracement in global benchmark yields and a return of investor consensus to focus on the US 10 year Treasury as the global barometer for bonds. So the question is – where is the yield on the US 10 year Treasury going?
It’s actually fallen dramatically over the last few weeks in line with the declines in oil prices, but we should look to history as a guide to the future direction of yields.
The US Federal Reserve has clearly telegraphed their intent to move very slowly and gradually on rate increases, ensuring at each step that the US economy is able to withstand the impact of rising rates.