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Can bond fund bounce continue this year?

Bond investors have enjoyed a recovery since the start of the year, and for funds positioned at the riskier end of the credit spectrum it has turned into a bonanza.

The global fixed income sector average is up 1.52% year-to-date. It has a 7.28% three-year cumulative return, outperforming the 5.96% return of the widely-used benchmark Bloomberg Barclays Global Aggregate Index.

The spread widening (versus US Treasury yields) during 2018 “improved the valuations of the fixed income spread categories”, stated Pieter Jansen, senior multi-asset strategist at NN Investment Partners in a recent note.

“Spreads have already tightened since the start of 2019 as markets recovered from dire economic expectations and benefited from the dovish central bank tone, combined with a more positive outlook on trade tensions and a rising oil price,” he added.

The sudden shift in sentiment has boosted funds with allocations to high yield credit sectors that were among the least favoured as investors turned cautious in the final quarter of last year.

High volatility

The ICBC Global Total Return Bond fund has posted the best three-year cumulative performance so far, earning 41.88% with a portfolio dominated by China property companies.

In second place is the Capital Group Global High Income Opportunities fund, which has hefty allocations to dollar bonds issued by Mexico, Turkey, Russia and other emerging countries, and has a 33.63% three-year cumulative return.

Also producing a strong performance is the Legg Mason Western Asset Short Duration High Income Bond fund, which invests in sub-investment grade US corporate bonds, and has returned 29.05% over three years.

Of course, funds that invest in high yielding bonds also experience greater volatility.

The Capital Group fund’s annualised volatility is 4.85% and the Legg Mason fund’s is 3.54% compared with a sector average of 3.15%, according to FE Analytics data. The volatility of the ICBC China real estate-heavy fund is a whopping 16.96%.

But, for now the outlook for credit remains sanguine.

“We think the current environment of sluggish growth and supportive monetary policy could continue for quite some time. This favours spreads, and given the sizeable repositioning of investors, widening of spread levels and better valuations, fixed income spread assets can benefit,” noted Jansen.


Global Fixed Income Sector vs Bloomberg Barclays Global Index (1yr performance)

Source: FE Analytics (in US dollars)

Global Fixed Income Sector vs Bloomberg Barclays Global Index (3-yr cumulative performance)

Source: FE Analytics (in US dollars)

Part of the Mark Allen Group.