Over the past year, the global economy has shown signs of cooling due to high interest rates and the tapering of extraordinary fiscal stimulus seen in the post-Covid world. US President Donald Trump’s tariff blitz has added a new dimension to the uncertainty.
Growth impulses are weakening around the world. Radical, disruptive change is being proposed in the US, where the Trump administration is promising fiscal discipline, driven by concerns about unsustainable levels of deficit, and to radically reshape the global trading system through the threat of aggressive tariffs. Investors are increasingly uncertain and cautious about the combined economic impacts of less stimulative fiscal spending, epitomised by the high-profile efforts of the Department of Government Efficiency (DOGE), and tariff induced disruption to long-established global trading patterns. The European Central Bank has been cutting rates due to worries about economic expansion, while China is stimulating aggressively to boost its economy.
The UK is bouncing along on the border of recession. With the housing sector hurt by high mortgage rates, insolvencies on the rise and consumer confidence in recessionary territory, one would expect the central bank to cut rates aggressively. Yet, the Bank of England (BOE) has been gradual and incremental in its approach, with only one 25bp rate cut in 2025 year to date. We believe the BOE is behind the curve in anticipating future economic weakness. We are already seeing leading indicators of future problems such as deteriorating Purchasing Managers’ Index (PMI) surveys on the economy and dwindling vacancies in the jobs market. As the job market weakens, likely to be exacerbated by the increase in employers’ National Insurance rates from April 2025, we are likely to see wage growth (and with it, inflation) cooling.
In the current bout of tariff induced market volatility, stocks have declined sharply, materially underperforming sovereign bonds. Sovereign yields have not significantly fallen yet – the traditional flight to safety by investors may be delayed as the market tries to assess the potential impact of tariffs on short term inflation and central bank policy. In credit markets, spreads initially widened on tariff news but have bounced back and continue to be near historically tight levels.
Investment grade bonds offer a valuable diversifier for investors in an uncertain and volatile market environment. Equities and high yield bonds typically have a positive correlation with economic conditions, while the opposite is true for government bonds and investment grade credit. Investment-grade credit, with its high credit ratings and lower risk compared to equities and high-yield bonds, could potentially offer an alternative for those seeking to tide over the economic uncertainty, even while reaping decent returns. With the asset class offering a material yield pick up over both prevailing inflation and short-term cash rates, investors have the prospect of income and scope for capital gain if cooling economic conditions give central banks some scope to cut interest rates.
Scenario analysis of potential returns for sterling investment grade credit (see below) highlights that prevailing yields offer positive skew for the asset class: i.e. the scope for positive return from a combination of falling interest rates and/or tightening credit spreads outweighs the scope for negative return from rising interest rates and/or widening credit spreads.
Scenario analysis of Jupiter Corporate Bond Strategy*
(estimated returns over next 12 months)
| Rates (GBP 10YR) (bps) | ||||||||||
| -200 | -150 | -100 | -50 | 0 | 50 | 100 | 150 | 200 | ||
| Spreads (iTraxx EUR 5Y) (bps) | -50 | 20.65% | 16.65% | 12.89% | 9.36% | 6.07% | 2.99% | 0.11% | -2.58% | -5.09% |
| 0 | 20.10% | 16.12% | 12.36% | 8.84% | 5.56% | 2.49% | -0.39% | -3.08% | -5.59% | |
| 50 | 19.55% | 15.57% | 11.83% | 8.32% | 5.05% | 1.98% | -0.90% | -3.59% | -6.10% | |
| 100 | 19.00% | 15.03% | 11.29% | 7.79% | 4.52% | 1.46% | -1.42% | -4.10% | -6.61% | |
| 150 | 18.44% | 14.47% | 10.74% | 7.25% | 3.98% | 0.92% | -1.95% | -4.63% | -7.14% | |
| 200 | 17.87% | 13.91% | 10.19% | 6.69% | 3.43% | 0.38% | -2.49% | -5.18% | -7.69% | |
* Based on portfolio as of March 31, 2025. Rates proxy is 10Y GBP rate. Spread proxy is iTraxx EUR 5Y
At current levels, the yields on high grade credit are attractive on a relative basis. Real yields also offer comfort as inflation has fallen from elevated levels. The longer duration nature of the asset class offers positive correlation to a falling interest rate environment, which we consider to be quite likely as UK economy slows and triggers a continued rate cutting cycle by the BOE.
That said, we still need to be selective in allocation. Given current tight credit spreads, there could be scope for market volatility if investor sentiment deteriorates in the context of a slowing economy. It’s important to be selective about the kind of assets one owns. In our fund, we have therefore reduced spread duration and are underweight high beta bonds and cyclical sectors. Our longer dated exposure is high quality to avoid being exposed to a selloff in spreads. We will be looking to add credit risk if and when credit spreads reprice to suitably attractive levels.
Our Jupiter Corporate Bond strategy invests at least 80% of the fund in investment-grade corporate bonds*. At least 80% of assets must be denominated in pound sterling or hedged back to the currency*. Currently, our strategy’s duration exposure is about two years longer than peers, which is at the high end of our self-imposed limit. We’ve achieved a chunk of that through gilt futures instead of expensive longer dated credit.
Within the credit portfolio, we are very disciplined and cautious about our choices, with a bias towards cheap issues. This selective approach ensures that investors are not overly exposed to the most expensive assets, thereby preserving the benefits of interest rate exposure.
In times of economic uncertainty, investment-grade credit serves as a valuable hedge against equity market volatility even while generating higher returns than sovereign bonds. Unlike equities and high-yield bonds, which tend to have a positive correlation with economic conditions, investment-grade credit can perform well even when the economy slows down. This negative correlation with economic conditions makes it an ideal asset class for diversifying portfolios and mitigating risk.
*This is a sector requirement
Strategy specific risks
- 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.
- 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 or total loss of value, or the investments may be converted into equity, both of which are likely to entail significant losses.
- 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.
- Market Concentration Risk (Geographical Region/Country) -Investing in a particular country or geographic region can cause the value of this investment to rise or fall more relative to investments whose focus is spread more globally in nature.
- 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 Default 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.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Important information
This document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Past performance is no guide to the future. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Quoted yields are not a guide or guarantee for the expected level of distributions to be received. The yield may fluctuate significantly during times of extreme market and economic volatility. The views expressed are those of the authors at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. For definitions please see the glossary at jupiteram.com. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and not a recommendation to buy or sell. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM or JAM.