Fixed Income Has Gone Global

In a complex market, active managers have latitude to look for the best risk-adjusted investments.


By Pilar Gomez-Bravo, CFA, MFS Director of Fixed Income – Europe

The potential diversification benefits of fixed income in a portfolio are well known by most investors. Adding bonds to an equity portfolio can help reduce portfolio volatility and protect capital over time. That’s why fixed income is sometimes referred to as the “ballast” of a well-rounded portfolio — these investments seek to deliver total return through income, principal protection and capital appreciation. The principles of diversification also apply to investments made within the fixed income sleeve of a portfolio. Many US individual investors, however, focus solely on US investment-grade bonds and may miss out on potential diversification opportunities. We believe investors are wise to take full advantage of the broad range of opportunities available to them — and there are many more today than just a few decades ago.

A changed landscape

The fixed income investment universe has changed dramatically over the last few decades. In the 1970s, bonds were mostly issued in the United States and in the US dollar. Since then, bond markets have grown exponentially around the globe — across regions, in currency denominations and in credit quality. The market capitalization for debt markets reached over $100 trillion globally at year-end 2016 — an expansion of 3.5 times in just two decades.[1] Today, the US represents less than 40% of the global fixed income market.  Many US investors continue to focus on domestic investment grade bonds, however, which are now less than half the overall market— and may be missing potential diversification benefits as a result.

Today’s opportunities: Combining bond sectors may improve diversification

The bond market offers diverse investment options spanning geographies (from developed and emerging economies), sectors (government, corporate and securitized), credit quality (from AAA to high-yield) and in a range of currencies. Individual segments of the bond market can be volatile at times, which is why a diversified fixed income approach may help improve a portfolio’s risk-adjusted returns and potentially improve income stability over time.

A bond strategy that included a range of fixed income exposures has historically reduced volatility and created a more consistent path for achieving long-term outcomes. In Exhibit 1, for example, a diversified strategy (see dark gray boxes), rebalanced quarterly, offered more consistent performance with less up-and-down movement than any of the single fixed income market segments during the 10-year period ended 12/31/16. However, it is important to note that diversification per se does not guarantee a profit or protect against a loss.

Exhibit 1:

Exhibit 1
Exhibit 1.1

Bond segments with lower correlations to each other may help diversify a portfolio

Correlation refers to how an investment or asset class performs relative to other investments during the same time period and under the same economic conditions. This concept helps investors better understand the potential benefits of diversification. A correlation value of “1” means that two investments move in tandem, whereas a correlation of “-1” means they move in opposite directions, and “0” means there is no relationship.

Historically, a high correlation between two asset classes has meant that their performance isn’t differentiated. Assets with lower correlation values have tended to perform with more differentiation during certain periods. Combining bond segments with low or negative correlations to each other may improve diversification and reduce a portfolio’s volatility over time.

Exhibit 2:

Exhibit 2

Please note that the correlation range shown represents MFS’ viewpoint and is not an industry standard.

13 S&P 500 Index measures the broad US stock market.

Low and negative correlations may be a good reason to include global, high-yield and nontraditional bond sectors in a well-diversified portfolio.

Fixed income has changed, but investor goals have not

While the fixed income landscape has changed over the years, investors still largely have the same goals within their bond portfolios. They seek stability, income and capital preservation. At MFS®, we believe a flexible, adaptable approach that includes a wide range of bond sectors is key to meeting those objectives while also potentially generating attractive risk-adjusted returns over full market cycles. Advisors, that’s why it’s important to work with your clients to make sure they are adequately diversified in their fixed income allocations.

More fixed income insights from MFS experts at MFS.com/FixedIncome

The views expressed in this commentary are those of Pilar Gomez-Bravo and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any other MFS investment product. 38236.1

[1] Bank of International Settlements data, as of Dec. 31 2016.

Low Inflation and Bond Funds

Low inflation lowers bond yields, but a well-managed fund may provide ballast against equity risk.

By Erik Weisman, MFS Chief Economist

A common question we get from advisors is, “How do you protect a portfolio in a rising rates environment?” Part of my answer is this: Don’t be so sure that rates are going up — because the bull market in fixed income may not be over.

We’ve experienced a 35-year bull run, and some would argue that rates can’t go much lower (see Exhibit 1). There are several headwinds to higher rates, however, and there is a case to be made for them to decline further. The current business cycle, for starters, is entering its ninth year, a longer-than-average period of expansion. While no one can know when it will end, it will turn at some point, as all cycles do. When we get to that point, rates are likely to fall, not rise. Rates could easily eclipse the lows we’ve experienced during this cycle as we try to make our way out of the next recession.

Exhibit 1: Bond yields remain near multi-decade lows

Exhibit 1

Disinflation everywhere

There is certainly a case to be made for upward movement in rates, as they continue to remain historically low.[1] But let’s break down sovereign yields into their components. Nominal interest rates are driven by real growth (labor and labor productivity), inflation and the term premium.[2] While the labor input is running high, labor productivity, inflation and the term premium are all historically low, with plenty of room to rise. These should signal rising yields — but history may not be a great guide for us in this environment.

What we have seen over the last several cycles is a sustained pattern of weaker economic growth (see Exhibit 2) and a strong tendency toward disinflation — meaning inflation that is persistently low or trending lower.

Among the most important disinflationary factors is demographics. We are currently seeing weak growth in the labor force, and that shows no signs of changing soon. Lower fertility rates around the world could keep it that way for many years. Looking back at the 1960s and the 1970s, labor force growth rates increased at a very healthy clip, around 2%–3% annually. That type of labor force growth tends to generate higher inflation. When a lot of people enter the workforce, demand grows, supply has to keep up and inflation generally increases. When inflation rises, it erodes purchasing power and becomes detrimental to fixed income investors. But the demographic profile of 50 years ago isn’t coming back, which means inflation and growth will likely remain low for some time.

Productivity, another key ingredient, has been historically low during this business cycle as well, and I don’t expect it to rebound anytime soon, given that capital spending has been weak for several years now. Thus, we see another headwind to GDP growth rates and bond yields.

Exhibit 2: Growth rates have trended lower over the last several decades
Exhibit 2
Technology has also advanced and is rapidly changing entire industries as disruptive – platforms, such as Uber and Airbnb, provide services and goods at lower prices. With less capital and labor needed to create considerable output, technology has become a significant disinflationary force.

We’re also living in a world of increasingly high levels of debt. Globally, there’s more outstanding debt as a percentage of output today than there was on the eve of the global financial crisis. Unless central banks move beyond quantitative easing and actually print money to directly finance consumption or public investment, debt tends to be disinflationary, as high debt levels can calcify potential future growth and inflationary pressures.

How should investors approach this yield environment?

Rates today are historically much lower than during past decades. As investors, we need to focus on the present and the future, as today’s environment is a departure from the past. Demographics, debt levels, economic growth rates and technology are all dramatically different. All of these factors are secular in nature, which means they aren’t likely to change anytime soon. It doesn’t mean that we won’t experience inflation or higher bond yields at times, but we’re likely to live in a low-yield environment for a very long while.

What does that mean for investors? While fixed income has changed over the years, investors largely have the same goals within their bond portfolios — stability, income and diversification. Bonds are supposed to provide ballast against the risk of holding equities. Even at these very low levels, bonds can still serve that purpose, especially if yields remain in a fairly low envelope for the rest of this business cycle. Investors should keep in mind that bonds are subject to risks, including market, inflation, interest rate and default, among others. At MFS®, we believe a flexible, adaptable approach that includes exposure to a wide range of bond sectors is one key to generating attractive risk-adjusted returns and managing risk over full market cycles. We think investors should remain diversified in their bond portfolios and resist the temptation to change allocations based on news headlines or whimsical economic flavors of the month.

More fixed income insights from MFS experts at MFS.com/FixedIncome

The views expressed in this commentary are those of Erik Weisman and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any other MFS investment product. 38218.1

[1] As of June 2017.

[2] The term “premium” generally refers to the excess yield that investors require to invest in longer-term vs. shorter-term bonds.

How to Lower Your Car Insurance Rate

How to Lower Your Car Insurance RateCar insurance is a necessary aspect of owning and driving a car. But that does not mean that you should expect to pay high rates for good coverage. The truth is that there are a variety of car insurance options, as well as the opportunity to lower a current rate. Here is a few different thing to keep in mind whether you’re just starting out or hoping to negotiate a brand new rate.

Compare Quotes

Whatever you do, don’t settle on the first car insurance rate you are given. Different insurance companies might be able to offer you different rates. Try to get at least three different quotes before you decide. This can feel a bit time consuming, but the effort is worth saving money in the long run. One reason why different insurance companies have different rates is that they use a different process. Some rely on independent insurance agents, others have their own, and some sell directly and don’t use agents at all. Switching car insurance policies is always an option, and sometimes it’s a viable one.

Request Higher Deductibles

When you are negotiating a car insurance rate it is always possible to request higher deductibles. This means that your monthly rate will go down, while the cost of repairs will go up. This is, of course, a plan that only makes sense when you anticipate having a clean driving record. If you go with this choice, be sure and set aside some money in case of emergency down the line.

Drop Your Collision Coverage

This might not be a good idea on a new car, but if you are driving an older car you might consider dropping your collision coverage. The reason for this is that the car might not be worth very much. Or at least not as much as it would be if it was a new car. You might end up paying more than it’s worth when it would be cheaper just to replace a totaled car in the event of an accident. If a car is worth less than ten times your premium, you might be able to do without. Be sure and find an accurate assessment of how much your car is worth before making any moves.

Ask For Discounts

There might be a variety of discounts available to you with the insurance provider you already have. People who drive minimally in the year might be eligible for low mileage discounts.  You might also be eligible for discounts based on your driving record. Some insurance companies offer discounts for people who have stayed clear of accidents and moving violations, as well as people who have good credit. Long time customers are sometimes rewarded in an effort to retain their loyalty, so that is something else to consider when you are getting insurance. Additionally, some alumni groups and business offer group deals. Always consider any circumstances like those that could potentially lead to your getting a better deal on car insurance.

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