In the US, rates markets continue to take center stage with the Treasury curve bear steepening in recent weeks. Yields on the 10-year and 30-year Treasuries reached new year-to-date highs on the heels of increased Treasury issuance, offshore pressure from Japanese central bank policy adjustments, and Fitch’s downgrade of the US credit rating.
A downgrade can lead to higher borrowing costs as it signals a higher perceived risk of default, pushing yields higher as investors demand a higher return for the increased risk. In our opinion, US Treasuries continue to be the world’s highest-quality and most-liquid bond market and act as safe-haven assets during economic and market stress. US Treasuries are also an important diversifier in portfolio construction.
Bank of Japan (BoJ) loosened its yield-curve-control (YCC) policy and created some added pressure on the global rates complex. The rationale is that BoJ’s allowing the 10-year JGB yield to move in a wider range could lead to higher yields on JGBs, making them more attractive to domestic investors and creating an imbalance in demand while supply is already heightened. The latest YCC policy can also lead to a rise in yields in other foreign bond markets.
Evidence shows that duration tends to be a significant tailwind for performance when the Fed ends the tightening cycle, and there is no subsequent recession. This scenario can be particularly beneficial for long-duration bonds because the absence of a recession can lead to stable or even declining interest rates, which can boost bond prices, leading to strong total returns for bond investors.
Across Fundopedia’s portfolios, we continue to favor investment-grade corporate bonds, and BB- and B-rated high-yield bonds. Within industries, we like leisure, autos, cable satellite, and senior financials in larger well-capitalized banks. Larger banks with strong capital positions are better equipped to navigate economic downturns and regulatory changes. They also offer stable dividends and can benefit from a rising rate environment.
It is essential to consider the associated risks. Investment-grade corporate bonds can face downgrades, especially during economic downturns. High-yield bonds, even with short durations, carry credit risk. Regulatory changes, technological disruptions, and macroeconomic factors can impact industry-specific investments.
It is always a good idea to periodically review your portfolio’s performance. Fundopedia adjusts the strategy based on changing market conditions and investment objectives. Please feel free to ask your Fundopedia consultant or advisor any questions.