London-based Nigel Jenkins, a managing director at Payden & Rygel, a Los Angeles-based global asset management firm, discusses why global bonds are attractive in 2023.
Nigel Jenkins at Payden & Rygel, who anticipates cash-like returns on global bonds for 2023, said returns could be higher if global growth weakens or lower if inflation picks up again.
This week, he highlighted that global bonds have outperformed US bonds in 2023, as rates in the US have risen faster than in other parts of the world. “The US has returned about 0.7 per cent so far this year and the global index is up 2.3 per cent. That's probably because the Federal Reserve has been more aggressive in raising interest rates this year,” he said.
“US Treasury yields have risen by a greater amount than other markets, and it's quite a long duration market as well. The rest of the world has started to slow down economically. Surprisingly the US hasn't slowed down. That's kept more upwards pressure on US yields than most other market yields,” he continued.
“Our strategy right now favours government bonds to a greater extent than is typical, since credit risk-free Treasuries now offer about 80 per cent of the average corporate bond yield,” he added.
“We are focused more on governments than corporates, at least to a greater extent than normal,” Jenkins said. “If you look at where corporate bonds trade relative to say a US Treasury, the amount of yield premium you get above government bonds is now about the average for the last 10 years, about 120 basis points. That’s pretty middle of the road, especially since we might be entering into a period of slower growth and greater uncertainty. That doesn't mean we don't own any corporates. There are still selected pockets of value and we focus more on investment grade rather than high yield. It does mean that we have less relative to benchmarks than we had earlier this year or this time last year,” he said.
Saying which countries bonds he finds attractive, Jenkins said the US is quite close to the top of the list now, particularly US Treasuries. “TIPs, or inflation-linked Treasuries, are one particular pocket value. You get say a 1.9 per cent yield on a 10-year inflation protected security backed by the US Treasury. Inflation risk is down a little over the last 18 months, but there’s still more of it than there has been at any other time in the last 20 years,” he continued. “So, if you can get close to a 2 per cent guaranteed yield in excess of whatever inflation turns out to be, with the backing of the US Treasury over 10 years, that's not a bad level of real yield. That's a higher real yield than you can get in most other markets as well,” he said.
“There are other components and markets that we like as well. We're quite big users of securitizsd assets in the US and outside the US, many are floating rate notes structures. You get credit exposure and spread exposure without necessarily having to have interest rate duration exposure. You also benefit from more diversified, less correlated returns with regular corporate bonds,” Jenkins added.
Jenkins said that the key case over the medium to long term, for investing in global markets is diversification. “The US investment grade aggregate benchmarks have volatility of around 4 per cent. Similar global benchmarks have volatility of about 3 per cent. You get less volatility because of diversification – and also because the US is one of the more volatile markets. That combination reduces your volatility by around a quarter,” he said.
Nevertheless, expected returns are about the same over the long term on a currency-hedged basis. “There are periods where you get more return from global bonds, and other periods where you get more return from US bonds,” he continued.
“Looking forward, it's hard to say over a 10 or 15-year period that there would be much expected difference at all in total returns. But we would expect the volatility to continue to be lower on a global index than a US-only index. Diversification is the main thing,” he added.
Jenkins said that there have been 10-year periods in the past where bonds have outperformed equities. “We haven't seen one for some time, but maybe we will over the next 10 plus years. These are very deep, generally very liquid markets with decent return potential. Global bonds can balance the riskier equities that may be in people's portfolio. Last year was horrible, the worst for 40 years. But from here there's a lot to be said for fixed income being a worthwhile investment,” Jenkins concluded.