Balancing Yield and Risk in a Changing World
SEARCH FOR YIELD DROVE GAINS.
The performance of fixed income plus sectors in 2017 highlights strong demand for yield.
Interest rates remain low by historical standards and have pushed investors beyond core fixed income sectors in search of yield. While core sectors have performed well so far in 2017, the increased diversification across (1) geography and (2) sectors drove stronger gains in core-plus sectors such as high yield and emerging markets.
As of September 30, 2017
Sources: Bloomberg Barclays, FactSet, JPMorgan, and S&P/LSTA.
1 Asset classes are represented by Bloomberg Barclays, JP Morgan, and S&P indices.
2 "Plus" sectors represent more aggressive, higher-risk sectors versus "Core" sectors.
Past performance cannot guarantee future results.
DIVERGENCE BRINGS OPPORTUNITIES...
Variations in interest rate and credit cycles offer diversification opportunities.
Interest rates are expected to rise in the U.S., fall in India, and stabilize in the eurozone. At the same time, overall credit quality has fallen in the UK, plateaued in the U.S., and recovered in the eurozone. The growing breadth, depth, and complexity of the fixed income market highlight the importance of broad diversification, in-depth research, and active management.
Interest Rate Cycle
As of September 30, 2017
Source: T. Rowe Price
Past performance cannot guarantee future results.
Credit Cycle
As of September 30, 2017
Source: T. Rowe Price
Past performance cannot guarantee future results.
...BUT MIND YOUR STEP.
A broader opportunity set carries benefits and risks and calls for a balanced approach.
A portfolio that includes plus sectors–such as high yield, emerging markets, and leveraged loans–could benefit yield-hungry investors. However, many of these enhanced-yield assets are highly correlated with equities, which could alter a portfolio’s broader risk profile. It’s important to be mindful of these risks and maintain a balanced approach to portfolio construction.
Yield vs. Duration
As of September 30, 2017
Sources: Bloomberg Barclays, FactSet, JPMorgan, S&P/LSTA
Analysis by T. Rowe Price
Asset classes are represented by Bloomberg Barclays, JP Morgan, S&P/LSTA, and benchmark government bond indices.
*Due to data availability, correlation data for EM Corporate are based on returns from January 2011 to present, rather than 10 years.
Past performance cannot guarantee future results.
10-Year Correlation
As of September 30, 2017
Sources: Bloomberg Barclays, FactSet, JPMorgan, S&P/LSTA
Analysis by T. Rowe Price Asset classes are represented by Bloomberg Barclays, JP Morgan, S&P/LSTA, and benchmark government bond indices.
*Due to data availability, correlation data for EM Corporate are based on returns from January 2011 to present, rather than 10 years.
Past performance cannot guarantee future results.
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This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
The views contained herein are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.
Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.
Past performance cannot guarantee future results. All investments are subject to risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.
"Search for yield drove gains..." chart:
Benchmarks represented are as follows: U.S. Treasury represented by the Bloomberg Barclays Global US Treasury Index, U.S. Aggregate represented by the Bloomberg Barclays U.S. Aggregate Index, Municipal Bonds represented by Bloomberg Barclays Municipal Bond Index, U.S. Investment-Grade Corporate represented by Bloomberg Barclays U.S. Investment Grade Corporate (300MM) Index, Global Aggregate represented by Bloomberg Barclays Global Aggregate Index, Bank Loans represented by S&P/LSTA U.S. Leveraged Loan 100 Index, Muni High Yield represented by Bloomberg Barclays Municipal Bond High Yield Index, Emerging Markets Dollar represented by JP Morgan EMBI Global Index, Emerging Markets Local represented by JP Morgan GBI-EM Global Diversified Composite Index, U.S. High Yield represented by Bloomberg Barclays U.S. Aggregate Credit- Corporate - High Yield (2000) Index, Global High Yield represented by Bloomberg Barclays Global High Yield Index. It is not possible to invest directly in an index.
"...but mind your step" chart:
Benchmarks represented are as follows: U.S. Treasury represented by the Bloomberg Barclays Global US Treasury Index, U.S. Aggregate represented by the Bloomberg Barclays U.S. Aggregate Bond Index, Municipal Bonds represented by Bloomberg Barclays Municipal Bond Index, U.S. Investment-Grade Corporate represented by Bloomberg Barclays U.S. Investment Grade Corporate (300MM) Index, Global Aggregate represented by Bloomberg Barclays Global Aggregate Index, Bank Loans represented by S&P/LSTA U.S. Leveraged Loan 100 Index, Muni High Yield represented by Bloomberg Barclays Municipal Bond High Yield Index, Emerging Markets Dollar represented by JP Morgan EMBI Global Index, Emerging Markets Local represented by JP Morgan GBI-EM Global Diversified Composite Index, U.S. High Yield represented by Bloomberg Barclays U.S. Aggregate Credit- Corporate - High Yield (2000) Index, Global High Yield represented by Bloomberg Barclays Global High Yield Index. It is not possible to invest directly in an index.
Bloomberg Index Services Ltd. Copyright © 2017, Bloomberg Index Services Ltd. Used with permission.
Copyright © 2017 FactSet Research Systems Inc. All rights reserved.
Information has been obtained from sources believed to be reliable but JP Morgan does not warrant its completeness or accuracy. The index is used with permission. The Index may not be copied, used, or distributed without JP Morgan’s prior written approval. Copyright © 2017, JP Morgan Chase & Co. All rights reserved.
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