Five Reasons To Rethink An Allocation To High Grade Bonds

Five Reasons To Rethink An Allocation To High Grade Bonds

High grade sovereign (or government) bonds remain as relevant as ever in an uncertain and complex market environment.

Today’s bond yields are indeed low, and some investors may be finding it difficult to justify a portfolio allocation to high grade bonds. However, research and experience shows that in periods of market stress, investing in high grade bonds can provide investors with an opportunity to mitigate high risk growth assets, given a low correlation and provide relatively robust returns over time.

  1. Downside protection:

    High grade bonds perform vastly differently relative to risk assets and other debt instruments. They can be a source of genuine and evergreen liquidity and portfolio defence.

  2. Low correlation to risk assets:

    Throughout history, high grade bonds have provided portfolio protection, especially against more risky exposures (albeit potentially tempered as a function of lower yield levels).

  3. Efficient returns:

    While an exposure to high grade bonds will likely deliver more modest returns compared to long-term trend, this needs to be viewed relative to a set of traditional asset class returns which are likely to be more muted. Each basis point of return – especially looking ahead – will matter (and be harder to come by).

  4. Asset quality matters:

    March 2020 has provided investors with a valuable reminder that ‘asset quality’ matters – especially in times of stress. Many asset owners have been soured by the experience of widening fixed income sell spreads, limited withdrawal windows, and for pre-retirees the occurrence of a sequencing risk event. More attention is likely to converge on higher quality assets.

  5. Portfolio diversification:

    A defence exposure to balance out other defensive exposures and provide further portfolio diversification, in a world where volatility is here to stay.

For more information, download the full A Lasting Bond, High Grade Bonds And Their Long Term Role In A Well-Balanced Portfolio whitepaper by Jamieson Coote Bonds using the form below.

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Paul Chin
SF Fin Director, Head of Investment Strategy & Research, Jamieson Coote Bonds
Paul provides macro analysis and input as well as investment insight and research to benefit the security section process. Paul is a career investment researcher and portfolio manager across the US and Australasia. He has previously worked at Colonial First State, Advance Funds Management, Barclays Global Investors (now BlackRock) including as a portfolio manager in San Francisco and Vanguard as senior investment strategist. He has authored/co-authored bond, multi-asset and factor-based thought-leadership for Vanguard. He also serves as an independent member of a number of Investment Committees, delivering asset allocation, manager selection and bond insights.


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