…that one of the best performing markets this year was the one that started the year with the lowest yield…Japanese Government Bonds (JGB) of course, which have returned 2.2% year to date against -0.45% for US Treasuries and just 0.10% for German Bunds. Only high yields bonds look better where the return for the US high yield index is 2.8%.
This does serve as a good reminder of the returns that fixed income assets can generate even at low yield levels and also of the virtues of active management. The latest move takes JGB yields back to 2003 levels and just 10bp off the all time yield lows. Looking forward, the probability of another 20bp yield decline on the back of the first quarter move does look remote. It’s a reasonable bet that JGBs are unlikely to be at the top of the leader board next quarter.
So where do investors position as we enter Q2?
Well, our quarterly macro conclusions re-affirmed that the macro backdrop, sluggish growth and accommodative central banks, is likely to remain favorable for fixed income. Within fixed income we still favor the higher yielding sectors: emerging markets, high yield and select investment grade bonds where spreads remain attractive. At the very least investors should clip the coupon and there is the potential for capital gains if spreads contract further. As JGBs have just demonstrated, fixed income markets have not lost the capacity to (positively) surprise.