Maximum maturity fixed income portfolios may be an option if you’re looking to invest for a specific period of time and earn a predictable yield.

After a sharp but short-lived sell-off at the end of 2018, stock markets have rebounded to levels more consistent with their long-term averages throughout 2019. Meanwhile, bond yields have fallen due to a combination of lower central bank interest rates, slow economic growth and low inflation expectations. Today, close to 30% of government global bonds worldwide now trade at negative yields, including many bonds issued by non-government issuers.

Size of negative yielding debt market has been increasing

Source: Bloomberg, ICE BofAMerrill Lynch, J.P. Morgan Asset Management. Data as of September 2019.


In our view, with interest rates unlikely to rise any time soon, investing in this environment poses challenges for fixed income investors. Given the outlook for slowing global economic growth and the strong performance of fixed income markets so far this year, it’s worth looking for other opportunities to earn income during this mature phase of the business cycle.

Credit spreads (the difference between the yield on corporate and government bonds) are far from the highs of 2018. However, pockets of value remain. That’s why in the hunt for yield, it is important to be able to look for opportunities across the full breadth of global fixed income markets.

One option is to consider a diversified bond portfolio that can invest in global fixed income securities with a predefined maximum maturity date. This approach can help to achieve a predictable income stream over a specified period of time.

The breadth of the global fixed income markets

Source: PIMCO, Haver Analytics as of March 31, 2019.


In a maximum maturity fixed income portfolio, the portfolio manager invests in a globally diversified pool of bonds with similar maturity dates. This type of investment is ideal if you are looking for predictable income and your initial investment returned on a specified date. For example, you may be putting money aside to pay education fees or to buy a property.

It is important that the vehicle you use to invest in a maximum maturity bond portfolio is appropriate for your situation. Over the past few years, a number of bond funds with a target or fixed maturity date have been launched. Investors have to pay an additional fee or penalty if they sell these bond funds before the maturity date in addition to any change in the value of the underlying assets. Some of these funds have taken on significantly concentrated risks in order to achieve higher yields.

 


Employing leverage provides an opportunity to generate even higher returns. In certain sectors of the fixed income market, using a prudent level of borrowing can be a way to increase a portfolio’s return potential without adding more credit risk. However, investors should be aware of the additional risks leverage brings, such as increasing the volatility of the performance. Additionally, for a maximum maturity fixed income portfolio, the yield of the portfolio could fall as the maximum maturity date approaches, and could even drop below the cost of borrowing.
 


Income generation continues to be a top priority for many investors. Given that the business cycle is now in a mature phase with the potential for interest rates to go even lower, it’s worth considering reinvestment risk. A portfolio of bonds that are all maturing at the same point in the future can help to mitigate this risk. Moreover, yields for short-dated fixed income bonds have dropped so far this year. A maximum maturity fixed income portfolio does not need to be laddered out with exposure to short-dated bonds but can invest close to the portfolio’s maximum maturity.

Therefore, a diversified global portfolio may provide diversified sources of yield while a maximum maturity date may provide predictable proceeds for an expected need in the future. As with all investing, this approach is not without risk. For example, the expected yield on the portfolio may change as a bond is sold or called before maturity and the proceeds need to be reinvested at potentially lower yields.

As always, you should keep in mind how your portfolio will respond in changing markets and whether your portfolio is positioned in a way that aligns with your long-term goals. Today’s ever-changing markets require investors to be informed. We encourage you to have a conversation with your J.P. Morgan representative.


Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment, and reinvestment risk.

Index Definition

The ICE BofAML Global Broad Market Index tracks the performance of investment grade public debt issued in the major domestic and eurobond markets, including 'global' bonds.