Ariel Bezalel and Harry Richards, investment managers of the Jupiter Dynamic Bond fund, outline their macro thesis for investing in current markets and give an update on portfolio positioning.

“Financial markets are tightening up and they are going to do some of the work for us”, said Federal Reserve governor Christopher Waller, in a sign that the tide is beginning to turn in the Fed’s rhetoric about the future path of interest rate policy.

While the minutes from a recent FOMC meeting still speak of “proceeding” with current policy, the committee twice stresses that they must do so “carefully”. We would argue they should have been more careful before now.

Central banks, guided as they are by their main KPIs of managing inflation and unemployment, are having their policy action dictated by two of the most lagging indicators it is possible to find. It is the equivalent of driving a car while looking in the rear-view mirror. But if we look at the latest leading indicators to get a view of the road ahead, we can see a range of factors pointing towards recession.

Our macro thesis

  • Hard landing

    for the US economy driven by monetary contraction and tighter lending standards.
  • Recessionary forces

    fuelled by depletion in household savings and slack in the job market.
  • End of the tightening cycle

    as the rolling over of growth and wages create room for central banks to act.
Monetary policy acts with “long and variable lags”, and while US GDP numbers and spot job market data (e.g., unemployment) have been fairly solid up until now, there are cracks starting to appear as Manufacturing remains weak and Services PMIs are now starting to follow.

Consumer spending has been a key supportive factor in the last quarters as excess savings get re-absorbed into the economy, but (see chart below) savings buffers have now been depleted for the large majority of households. In such an environment, it is hard to see how consumer momentum can keep contributing to robust growth – especially with the resumption of student debt repayments in Q4.

Source: Federal Reserve, Bloomberg calculations, as at September 2023. Note: March 2020 = 100

While the job market remains strong on the surface, we are starting to see some change in trends. The unemployment rate continues to trend upwards, coming in higher than consensus for September at 3.8%. Similarly, the decrease in quit rates and the increase in permanent job losses signal some loosening in the jobs market, while trends in temporary employees and overtime hours point to additional slack ahead.

Furthermore, it seems that many market participants have stopped focusing on the state of the US banking system. As the chart below shows, there is still a chasm between deposit costs for commercial banks and the yields offered by simple money market instruments, with deposit uncertainty or lower profitability a very likely consequence. Recent trends in bank assets and commercial and industrial loans, now in contractionary territory, clearly show the consequences of tighter credit standards in action. This should be a further headwind for the broad economy and the job market moving forward.

Yield on US Money

Source: Bloomberg, as at 30.09.23

On a more positive note, we see clear progress in the disinflation path across many major economies, with trends in supply chains and commodity markets showing that further disinflation is in the pipeline. Recent trends in energy markets and especially crude prices are something we are closely monitoring, especially in relation to the current instability in the Middle East. The combined effect of a stronger dollar, higher fuel prices in a moment of lower excess savings and as student loan repayments start once again looks to us a toxic cocktail for the US consumer. It is worth noting that any rise in oil prices at this juncture will simply divert spending from other areas of the economy.

In such an environment, we think that the next 6 to 12 months should provide central banks across the globe with reasons (or perhaps the need) to be less hawkish. Developed markets central banks look still fairly data dependent, but looking at emerging markets we already see some rate cuts. Brazil and Chile already started their rate cutting cycle, as has Hungary. These are the same central banks that first started hiking two years ago and may be a good leading indicator for developed markets.

Finally, China is the elephant in the room. Although August data showed some improvement, the data remains sluggish. We do not believe that current support measures enacted by the government will prove sufficient to solve the structural imbalances within the housing market where 20-30% of GDP is from construction. Chinese property is the biggest asset class in the world. Piecemeal measures announced thus far are unlikely to have much long-lasting effect.

Our portfolio positioning


  • Material value in government bonds

    from select developed and emerging market issuers.

  • Increased exposure to the front and middle of the curve

    which would be set to benefit from a shift in Fed policy.

  • Reduced cyclicality across the credit book

    while taking advantage of individual situations where there is an opportunity to invest at attractive yields.

We see material value in government bonds in developed markets (US and Australia in particular) and in some emerging markets (such as S. Korea, Brazil) and prefer to maintain the strategy’s relatively high duration exposure.

We nevertheless remain active in adjusting the strategy’s exposure as market realities develop. The most important recent shift occurred in our allocation to government bonds, when we increased overall duration to 8.3 years (+1 year). This increase in rate exposure mostly came from increased exposure to the United States via futures on 2Y and 5Y US Treasuries.

Credit markets look complacent in the face of mounting recessionary risk, with global high yield spreads well below recessionary averages. Nevertheless, the overall level of yield provides a decent cushion for investors even in an environment of higher spread volatility. We also see dispersion across regions, rating segments and sectors. Lower quality European High Yield is already pricing recession risk. Across our corporate bond holdings, we continue to reduce overall cyclicality with an eye to potential future economic weakness. We prefer companies that we have confidence will survive even a tough recession, with a strong bias to conservative sectors and shorter maturities.

Ratings Breakdown

Source: Jupiter, as at 30.09.23.

Current events in the Middle East are highly fluid, but there is a clear potential for escalation which – in addition to the appalling human cost – may have implications for oil prices. In terms of direct exposure to Israel, at the moment Jupiter Dynamic Bond only holds Teva Pharmaceuticals (c.1.7% position size), although the company’s actual production in Israel is just 8% and revenues generated in the country are just 2%. We do not have any meaningful credit exposure in the portfolio to the Middle East (just 0.3%) or to credits where oil is a significant input.

An enticing investment opportunity

Market participants would perhaps be wise to remember that changes in monetary policy can be slow to manifest themselves. However, history suggests when the impact is felt it can be dramatic and quick.

An environment in which inflation rolls over, growth falters, and the employment picture worsens is one in which continued hawkish policy from the Federal Reserve will rapidly become untenable and cuts will follow. In our view this lays the foundation for an extremely promising investment environment for fixed income.

We have a high level of conviction in our macro view, but of course we know that nothing is guaranteed and there are factors which could de-rail the world from this path. The world is an unpredictable and volatile place, as we all see ample evidence of every day. Whatever fate throws at bond markets, however, the vast breadth of fixed income asset classes available means we have confidence that a flexible and dynamic global bond portfolio should have the tools at its disposal to meet that challenge. The investment opportunity in fixed income, as we see it, is an enticing one.

Fund specific risks:

This fund can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The sub fund(s) may be subject to various other risk factors, please refer to the Prospectus for further information.
Currency (FX) Risk – The Fund can be exposed to different currencies and movements in foreign exchange rates can cause the value of investments to fall as well as rise.

Sub investment grade bonds – The Fund may invest a significant portion of its assets in securities which are those rated below investment grade by a credit rating agency. They are considered to have a greater risk of loss of capital or failing to meet their income payment obligations than higher rather investment grade bonds.

Interest Rate Risk – The Fund can invest in assets whose value is sensitive to changes in interest rates (for example bonds) meaning that the value of these investments may fluctuate significantly with movement in interest rates e.g. the value of a bond tends to decrease when interest rates rise.

Credit risk – The issuer of a bond or a similar investment within the Fund may not pay income or repay capital to the Fund when due.

Pricing risk – Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.

Contingent convertible bonds – the Fund may invest in contingent convertible bonds. These instruments may experience material losses based on certain trigger events. Specifically these triggers may result in a partial of total loss of value, or the investments may be converted into equity, both of which are likely to entail significant losses.

Derivative risk – The Fund may use derivatives to generate returns and/or to reduce costs and the overall risk of the Fund. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment.

Counterparty Risk – The risk of losses due to the default of a counterparty e.g. on a derivatives contract or a custodian that is safeguarding the Fund’s assets.

Charges from capital – Some or all of the Fund’s charges are taken from capital. Should there not be sufficient capital growth in the Fund this may cause capital erosion.

For a more detailed explanation of risks, please refer to the “Risk Factors” section of the prospectus.

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