By Steve Bramley, Fixed Income Director at Fidelity International
What an eventful year it has been. Then you remember we have just ended March. With financial markets having shown signs of stabilisation at times of late, it remains to be seen whether the worst of the recent downturn has passed, or if we have simply entered the eye of this particular storm. Looking beyond exactly “what happens next” for a moment, it seems as good a time as any to share a few thoughts on the bigger picture for global bond markets. After all, many investors will arrive at a crossroads in the coming weeks and months, faced with some challenging portfolio rebalancing and/or asset allocation decisions. On the bright side, we happen to think there are a few silver linings for investors to consider from a fixed income perspective.
High-quality bonds help dampen volatility
Many have pointed out that certain safe haven assets (most notably gold) did not behave quite as you would expect at the most intense phase of the recent market sell-off. While this might hold true on certain days, the good news for long-term investors is that gold is still among the best performing asset classes year-to-date and the US Dollar did not disappoint during said period. High-quality bonds have also played a crucial role year-to-date as part of a balanced portfolio.
As Chart 1 illustrates, long-dated US Treasuries have delivered a total return in excess of +20% since the turn of the year (the 7-10 year US Treasury Index has delivered +10%), while the S&P 500 Index is down around -20% over the equivalent period. High-quality corporate bonds may not have fared as well as government bonds in total return terms, but have nevertheless helped to cushion the fall from traditional risk assets. For context, at an index level, global investment grade credit has posted a mid-single digit negative total return year-to-date (-5.2%, in USD).
Put simply, if an investor had been fully invested from the start of the year in a diversified range of assets, the more high-quality bond exposure they had in their portfolio, the better they’d have performed on average. Hindsight is a wonderful thing of course. The important point here is that the traditional, core attributes of bond investing – namely being in a position to deliver a regular income stream, low volatility and diversification from equities – remain intact. With a huge amount of uncertainty on the horizon, we expect high-quality bonds and diversification more broadly to play a key role in investors’ portfolios going forward.
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