Improve your yield as rates will stay low

Central banks have responded to the COVID-19 outbreak with a renewed round of monetary easing. The Federal Reserve and Bank of England have both bought rates close to zero, and rates in the Eurozone and Japan remain negative. In addition, central banks have intensified bond buying programs.

As a result we expect rates to stay low for longer. With equity markets under pressure and government bond yields at or close to record lows, investors should consider ways to enhance the yield of their portfolio. We see a number of opportunities:

Allocate to emerging market sovereign bonds and US high yield.

Both asset classes offer attractive yields in our view, and have already priced in much of a downside scenario relative to equities. Historically, entering these asset classes at these levels (spreads in excess of 500bps and 800bps for EMBI and US HY respectively) has been a good strategy – with 12-month total returns being positive in most cases.

Tilt toward dividends.

We believe investors should tilt their equity holdings toward high dividend-paying investments. The gap between dividend yields and bond yields is wide, particularly in the Eurozone, Switzerland and the US and we look for stocks with high and sustainable dividends.

Benefit from higher volatility.

Volatility has jumped in response to the COVID-19 pandemic, with the VIX US volatility index and the V2X European volatility index both hitting their highest levels since the 2008 financial crisis. Periods of high volatility make explicit portfolio protection – such as puts – more expensive. For investors who can implement options, selling puts at these extreme levels may generate a greater premium than usual. The result is an opportunity to gain access to equity markets with a margin of safety if the stock market continues to fall and income if markets rally from here. Investors looking for further downside cushioning can also look to structured investments, which might be able to provide additional while offering a degree of capital protection.

Crossover bonds

In Europe, we look for select investments in the “crossover zone” between investment grade and high yield. The ECB is buying bonds, so corporate spreads should be rela-tively contained, and investors able and willing to stomach the potential volatility of “crossover credit” investments can earn potentially significant alpha if key rating agency action is anticipated correctly.

Asia HY and IG

In Asia, we look for good-quality names in the high yield space, and prefer BBB within investment grade. We favor investment grade bonds, which can provide enough spread cushion to withstand the volatility in rates, including Chinese government-related issuers and select corporate bonds issued by Indian privately-owned companies. China property remains our preferred sector in high yield.

Options and futures are not suitable for all investors, and trading in these instruments is considered risky and may be appropriate only for sophisticated investors. Prior to buying or selling an option, and for the complete risks relating to options, you must receive a copy of "The Characteristics and Risks of Standardized Options." You may read the document at http://www.optionsclearing.com/about/publications/character-risks.jsp or ask your financial advisor for a copy