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The Portfolio Construction and Strategy Team reflects on the past yearās painful drawdown in fixed income markets and explains why, after investors had wisely been moving to the short end of the yield curve, intermediate-duration bonds may now be more attractive.
This article is part of the latest Trends and Opportunities report, which outlines key themes for the next stage of this market cycle and their nuanced implications across global asset classes.
Longer-duration assets have historically been a better ballast in true risk-off environments and can act as a diversifier to a short-duration allocation.
Source: Morningstar, as at 31 December 2022.
Source: Janus Henderson, assuming a 1-year holding period, as at 31 December 2022.
10-Year Treasury Yield is the interest rate on U.S. Treasury bonds that will mature 10 years from the date of purchase.
A yield curve plots the yields (interest rate) of bonds with equal credit quality but differing maturity dates. Typically bonds with longer maturities have higher yields.
Basis point (bp) equals 1/100 of a percentage point. 1 bp = 0.01%, 100 bps = 1%.
Bloomberg U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
Duration measures a bond priceās sensitivity to changes in interest rates. The longer a bondās duration, the higher its sensitivity to changes in interest rates and vice versa.
Volatility measures risk using the dispersion of returns for a given investment.
Yield cushion, defined as a securityās yield divided by duration, is a common approach that looks at bond yields as a cushion protecting bond investors from the potential negative effects of duration risk. The yield cushion potentially helps mitigate losses from falling bond prices if yields were to rise.
IMPORTANT INFORMATION
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
U.S. Treasury securities are direct debt obligations issued by the U.S. Government. With government bonds, the investor is a creditor of the government. Treasury Bills and U.S. Government Bonds are guaranteed by the full faith and credit of the United States government, are generally considered to be free of credit risk and typically carry lower yields than other securities.
High-yield or “junk” bonds involve a greater risk of default and price volatility and can experience sudden and sharp price swings.