American Income Strategy: A balancing act for modern day investors
Summary
For investors, if 2020 was about a US Federal Reserve (Fed) policy-induced party, then 2021 could be about the Fed taking the punchbowl away.
For investors, if 2020 was about a US Federal Reserve (Fed) policy-induced party, then 2021 could be about the Fed taking the punchbowl away.
Despite the Fed’s repeated reiteration of its dovish policy and playing down the impact of inflation risks, the bond market is clearly undergoing a pivotal shift from extraordinary monetary policy support to economic fundamentals taking the lead. Stronger fiscal stimulus in the US could also add fuel to the fire.
Bond investors are already having a bad start this year. Global bonds as measured by Bloomberg Barclays Global Aggregate Index is down -4.6% while Long Term US Treasury Index is down -10.4% in Q1 this year.1 Long dated treasury bonds are down sharply due to its long duration and the lack of interest income to buffer adverse rate movement. Amid concern about the outlook of higher interest rates, investors are starting to question the value of holding bonds as part of a portfolio. While it is easy to dismiss bonds when interest rates are rising, however, every bond fund is different and suits different investment goals. As such, it is important to consider the roles that various fixed income asset classes play in a portfolio.
How can investors balance the risks in their portfolios?
Allianz American Income (the Fund) --- a fixed income solution that focuses on balancing interest rate and credit risk --- helps bring diversification benefit and resiliency within a portfolio. The Fund invests in government bonds and investment grade corporates while adding high-yield bonds to enhance potential income. As the goal of the Fund is to provide potential yield (Yields are not guaranteed. Dividend may be paid out from capital.)Note and liquidity, there are no complex securitized product or derivative instruments. This is to ensure that the Fund manages downside risk especially during periods of adverse stock market movements.
Although today’s rising rates environment may cause bond funds to look less attractive against other investment options, it is important to look at the role of a bond fund within a portfolio context. History has demonstrated that no single asset class can be the winner all the time, and this is especially the case when the market environment is always changing with unpredictable volatilities. The bottom line for investors is that they must not allow short-term market uncertainty to derail their long-term goals. At the end of the day, having an allocation to bonds could provide diversification benefits and a traditional balanced portfolio does not go out of style.
Source: Bloomberg, ICE Data Services, Allianz Global Investors. Data as of Jan 2000 to Dec 2020. Bonds are represented by 20% ICE BofA 1-10Yr US Treasury & Agency Index/50% ICE BofA 1-10Yr US Corporate Index/30% ICE BofA US High Yield Index; Stocks represented by S&P 500 Index. The information above is provided for illustrative purposes only, it should not be considered a recommendation to purchase or sell any particular security or strategy or an investment advice. Past performance is not indicative of future performance.
Stay covered with Allianz Global Investors income strategies.
Visit hk.allianzgi.com/income
1Source: Bloomberg, ICE Data Services, Allianz Global Investors. Data as of 1 Jan 2021 to 31 Mar 2021.
Information herein is based on sources we believe to be accurate and reliable as at the date it was made. We reserve the right to revise any information herein at any time without notice. No offer or solicitation to buy or sell securities and no investment advice or recommendation is made herein. In making investment decisions, investors should not rely solely on this material but should seek independent professional advice.Investing in fixed income instruments (if applicable) may expose investors to various risks, including but not limited to creditworthiness, interest rate, liquidity and restricted flexibility risks. Changes to the economic environment and market conditions may affect these risks, resulting in an adverse effect to the value of the investment. During periods of rising nominal interest rates, the values of fixed income instruments (including short positions with respect to fixed income instruments) are generally expected to decline. Conversely, during periods of declining interest rates, the values are generally expected to rise. Liquidity risk may possibly delay or prevent account withdrawals or redemptions.Investment involves risks, in particular, risks associated with investment in emerging and less developed markets. Past performance is not indicative of future performance. Investors should read the offering documents for further details, including the risk factors, before investing. This material and website have not been reviewed by the Securities and Futures Commission of Hong Kong. Issued by Allianz Global Investors Asia Pacific Limited.Allianz Global Investors Asia Pacific Limited (27/F, ICBC Tower, 3 Garden Road, Central, Hong Kong) is the Hong Kong Representative and is regulated by the Securities and Futures Commission of Hong Kong. (54/F, One Island East 18 Westlands Road, Quarry Bay, Hong Kong).
Want to view more?
Preparing for the reference rate change
Summary
After the Financial Crisis, InterBank Offered Rates (IBORs) have been declared unreliable by Regulators and new Alternative Reference Rates transactions-based have been developed to substitute these indices. Consequently, most of the IBORs will cease to be published from December 2021. As IBORs are used in a broad range of financial products and contracts, market participants need to be prepared and work on a plan to move away from them.
Key takeaways
|