In a visit this week to Australia, John Taylor, AB’s London-based Portfolio Manager—Fixed Income, said bonds can still serve to mitigate shocks from volatile equity markets.
“The notion that bonds can still have an important role to play in portfolios may surprise many investors—particularly those focused on home-country markets,” Taylor said.
But Taylor warned that "not all bonds are created equal".
“Although the bonds referred to in media headlines are usually government securities, bond markets are actually quite diverse. In addition to government bonds, they include corporate bonds or credit and other, more specialized, securities, such as mortgage-backed bonds,” he said.
Taylor said the global bond market provided a greater opportunity for diversification.
“This is particularly the case now, when global divergence in policy cycles lies behind much of the volatility being experienced by financial markets,” Taylor said.
“For example, although the Fed is raising rates in the US, Japan is still in the middle of a quantitative-easing programme—indeed, the Bank of Japan recently became even more accommodative by introducing a negative interest-rate policy—and we expect Europe to expand its quantitative-easing programme in March.
“In other words, even if interest rates in one country keep rising, those in other developed markets may fall—and create actionable opportunities for bond investors. The same may be true for emerging-market bonds, yields on which have risen recently, to the point where some reversion to more normal levels might be expected.”
In spite of bond yields sitting at historic lows, the head of a global asset manager has said they still have a role to play in diversified portfolios.