Weekly Bond Bulletin

13 December 2018

A year of transition

2018 has been a challenging year for market returns across the board. What has driven the uncertainty, and will volatility persist in 2019?


Negative sentiment in 2018 has been widely attributed to political turmoil—particularly trade war worries—as well as recessionary fears. While these factors are no doubt having an impact, we believe another drag on markets has been the undercurrent of reduced liquidity in the system, as central banks, particularly the Federal Reserve (Fed), have shifted to more restrictive policy stances. The move away from ultra-accommodative monetary policy is likely to persist in 2019, though we expect the pace of change to slow as we approach the end of the economic cycle. Peak global growth for this cycle is likely behind us, given fading momentum in the US, as tariffs, weaker global growth and reduced fiscal support take their toll. Market pricing of central bank actions next year is reflecting this outlook, with only 15 basis points (bps) of hikes from the Fed and just 8 bps from the European Central Bank (ECB) priced in. It’s important to keep in mind, though, that while financial conditions have tightened this year, they remain more favourable than at the recent peak in 2016, suggesting that this market pricing may be more dovish than is warranted.

Quantitative valuations

The increase in volatility (which could be seen merely as a return to more normal levels of volatility) has resulted in negative returns broadly across financial markets. Fixed income spread sectors have endured a meaningful move wider year to date: global high yield spreads are nearly 140 bps higher, global investment grade more than 50 bps higher, and emerging market sovereign spreads more than 100 bps higher. This risk-off sentiment is also evident in equity markets, where Europe, Asia and certain sectors of the US market have struggled significantly. The government bond market has been more nuanced, with dispersion in rate moves across regions. After rising more than 80 bps to peak at 3.24% on 8 November, the 10-year US Treasury yield has subsequently retraced nearly half of that move, to current levels below 3%. Meanwhile, just when investors thought German yields couldn’t go any lower, they have: 10-year Bund yields have fallen 20 bps this year, from 0.43% to 0.23% currently—the lowest level all year. (All data to 11 December.)


The liquidity drain—that is, the shift from quantitative easing to quantitative tightening—was well telegraphed. However, the impact that it would have on markets was less certain, due to the unprecedented nature of the policies themselves. As we move into next year, we can add another central bank to the list of those no longer actively buying bonds in the market, as the ECB winds down its public and corporate sector purchase programmes. While the ECB’s policy will remain in expansionary territory as it continues to reinvest the proceeds of its existing holdings, that still leaves the Bank of Japan as the only major central bank actively expanding its balance sheet. The net result? An environment of shrinking central bank balance sheets, and likely ongoing volatility for financial markets.

Entering a world of shrinking central bank balance sheets

Source: Federal Reserve, ECB, Bank of Japan (BoJ), Bank of England (BoE) and J.P. Morgan Asset Management forecasts; data as of December 2018. 3mma: three-month moving average. Opinions, estimates, forecasts, projections and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. There can be no guarantee they will be met.

What does this mean for fixed income investors?

2018 has been a transition year: to a higher volatility regime, to the late stages of the economic cycle, and to a world of quantitative tightening. As we look ahead to 2019, uncertainty is likely to persist, given question marks over the potential for global growth convergence, the direction of trade wars, and the ability of central banks to normalise policy before the next recession. For bond investors, this clouded global picture poses two key questions: Will duration be friend, or foe? And are spread assets signalling a value opportunity, or a value trap?

About the Bond Bulletin

Each week J.P. Morgan Asset Management’s Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.

Click here to read more about our FQT capabilities


The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our Company’s Privacy Policy. For further information regarding our local privacy policies, please follow the respective links: Australia, EMEA, Hong Kong, Japan, Singapore and Taiwan. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited; in Singapore by JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), or JPMorgan Asset Management Real Assets (Singapore) Pte Ltd (Co. Reg. No. 201120355E); in Taiwan by JPMorgan Asset Management (Taiwan) Limited; in Japan by JPMorgan Asset Management (Japan) Limited which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Cth) by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919); in Brazil by Banco J.P. Morgan S.A.; in Canada for institutional clients’ use only by JPMorgan Asset Management (Canada) Inc., and in the United States by JPMorgan Distribution Services Inc. and J.P. Morgan Institutional Investments, Inc., both members of FINRA; and J.P. Morgan Investment Management Inc. Copyright 2019 JPMorgan Chase & Co. All rights reserved.


13 December 2018

GFICC Investors

Building stronger fixed income portfolios for the future

View products