Bond Bites: Don’t worry, be flexible

Jonathan Gregory, Head of Fixed Income UK, outlines two major scenarios and their impact on the bond markets.

24 Sep 2019

Central banks provided the motive force that drove the good returns in developed market equities and bonds since the Great Financial Crisis. Policies that were intended to push against the risks of deflation brought us record low bond yields, negative cash rates and asset purchases on an unprecedented scale. Most asset classes did well as a result. But today a new force is driving market sentiment. Trends in international relations, which for the last 50 years embraced a liberal market approach of free movement of goods and capital, seem to be going into reverse. This poses a new challenge for investors. The most obvious sign is worsening US-China relations which carries the threat of trade-war, 'beggar-thy-neighbor' currency manipulation, tariffs and disruption to global supply-chains. And there are similar challenges caused by political decisions elsewhere. How these politically driven events play out will have as big a say in shaping future investment returns as central banks did in the last 10 years. But they are hard to predict, even for the most seasoned investors.

Two main scenarios

On one hand global leaders may navigate a path back from the fractured international relations of today to what already feels like 'World of Yesterday'; the world of open-markets and relatively free-trade. If so, then the worst case outcomes for global growth can be avoided. In the current climate, bond prices will probably fall, particularly in Europe, where deeply negative yields in core countries currently reflect a much more dismal outlook. But the breakdown in international relations could also accelerate, perhaps because some leaders pursue narrower populist agendas, or because they are not fully in control of events themselves.

 

Jonathan Gregory

Head of Fixed
Income UK

Best and worst FI sector returns over the last 5 years

This would take us to a deflationary 'Down the Rabbit Hole' world of higher prices, falling investment, lower profits and higher unemployment. In this case, bond prices are heading higher and credit and equity markets face serious downside risks. How can investors hope to protect their bond returns under these circumstances?

Our answer: flexibility and diversification

For instance our Global Dynamic Bond Fund has no fixed benchmark but the flexibility to invest in the best opportunities in bonds globally. Therefore we avoid 'hard-wired' exposures to the sectors that could be vulnerable if we return to 'The World Of Yesterday' such as Eurozone government bonds and we diversify. Today that means owning bonds in the US and China but with short positions in expensive regions like the Eurozone. This should support returns in either 'The World of Yesterday' or 'The Rabbit Hole World' because, in either case, we expect these regions to outperform; in other words they offer better relative value today.

For further information please contact your client advisor. Investors should not base their investment decisions on this marketing material alone.


Fixed Income insights

 

Asset Management services and solutions in your location

Please select your region

Important legal information

To proceed, please confirm that you are a professional / qualified / institutional client and investor.

Views and opinions expressed are presented for informational purposes only and are a reflection of UBS Asset Management’s best judgment at the time a report or other content was compiled. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions contained in the content of this webpage have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any errors or omissions. All such information and opinions are subject to change without notice but any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Source for all data/charts, if not stated otherwise: UBS Asset Management.
Any market or investment views expressed are not intended to be investment research. Materials have not been prepared to address requirements designed to promote the independence of investment research and are not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this webpage does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The materials and content provided will not constitute investment advice and should not be relied upon as the basis for investment decisions. As individual situations may differ, clients should seek independent professional tax, legal, accounting or other specialist advisors as to the legal and tax implication of investing. Plan fiduciaries should determine whether an investment program is prudent in light of a plan's own circumstances and overall portfolio. A number of the comments in the content of this webpage are considered forward-looking statements. Actual future results, however, may vary materially. Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss. 
© UBS 2019 The key symbol and UBS are among the registered and unregistered trademarks of UBS.

Reset