Aiming for perfect harmony

The fixed-income world faces a confusing cacophony of challenges. Striking the right keys at the right time is crucial to avoid discord. This calls for handing over the baton to the expert.

Generating alpha is all about hitting the right keys

The fixed income market is currently facing a hubbub of issues. Historically low yields, inflation worries, ultra-tight credit spreads, fears of stimulus unwinding, liquidity premium, concerns of a haphazard recovery and the emergence of new variants of coronavirus are just some of them.


The attempts by central banks to contain the effects of the upheaval caused by the coronavirus pandemic since early 2020 have depressed yields further. Indeed, the market value of negative yielding debt, both sovereign and corporate, almost equals the size of China’s GDP*. In the credit market, spreads have tightened significantly, resulting in elevated valuations.


Everyone is trying to second guess the trajectory of inflation and how soon policy makers will begin to tighten interest rates. It’s well known that policy makers have tried to rekindle inflation since the financial crisis more than a decade ago, with little success. In that world of falling yields and low volatility, economic outcomes were poor, as central bank liquidity flowed directly into financial assets.


Smooth transition



Bond harmony is finding the perfect composition

How do you position for reflation? What happens if an expected economic recovery is delayed? How do you balance risk and reward? How do you determine how much of an expected economic change is already priced in? Will interest rates remain lower for longer or will the central banks give a jolt? What is a realistic outlook for the various bond sub-asset classes? These are all challenging questions for fixed income investors.


Envisioning the long-term market trend is as important as finding returns in the short term. A right mix of assets is essential. Instruments considered less risky, such as sovereign bonds and investment grade corporate debt, may inevitably offer lower yields. On the other hand, higher yielding bonds may carry a greater risk of illiquidity and default. Hedging such risks through derivatives may also entail costs, while following the herd mentality could prove costly if everyone runs for the exit at the same time.


To navigate this complex world, an in-depth understanding of macroeconomic factors such as ageing demographics is as important as studying flows, reading central bank liquidity data and keeping an eye on the vagaries of the currency markets. Understanding what the sheer level of global indebtedness means for inflation and growth is equally important. In this environment, we believe that flexibility and nimbleness are likely to be key to achieving desirable outcomes in fixed income portfolios.

Jupiter offers several potential ‘one-stop’ solutions for investors seeking expertise to allocate their assets dynamically between the various fixed income sub-asset classes as market conditions and the economic environment change over time. Both the Jupiter Dynamic Bond Fund and the Jupiter Strategic Absolute Return Bond Fund (SARB) take an active and flexible approach to investments.

Both the strategies also use similar techniques to study macroeconomic trends to analyse the potential outcome for the global economy. However, the two strategies express that analysis in very different ways. The Dynamic Bond strategy expresses many of those themes by choosing the right sectors of the economy to be exposed to, while also setting the best duration overlay to reflect that analysis. The fund uses only limited foreign exchange exposure. SARB uses limited credit exposure and looks to express its macro views mainly