July 2019

As summer begins, fixed income and treasury investors are feeling the heat from macro uncertainty, low interest rates and the ageing credit cycle.

The new UK Brexit deadline of 31 October has extended the period of economic uncertainty, with daily headlines on the Conservative Party leadership election fanning the flames of volatility near-term. Some market participants are factoring in increased probabilities of a general election, a ”no-deal” Brexit and a Corbyn government.

US-China trade negotiations are also contributing to economic worries, as tariffs could affect not only the US and China, but other major trading partners, such as the European Union. A prolonged trade dispute also increases the chance of the US slipping into recession.

Unsurprisingly, central banks are remaining dovish and the market is pricing in multiple cuts globally. The Bank of England has reduced growth forecasts and raised the alarm about the impact of a no-deal Brexit. The UK bond market is currently staying neutral, pricing in no rate changes.

Finally, the ageing credit cycle brings expectations of widening credit spreads and an increase in downgrades. Our economists predict around 9% of the BBB global corporate bond universe could be downgraded to sub-investment grade in the event of a “normal” US recession. The disparity of spread movements across this BBB rated universe is high, increasing risk.

Hit the ultra-short sweet spot

Investors can employ a few strategies to beat the macro heat and boost returns from their liquid investments.
In the current uncertain and volatile macro environment, where it is difficult to see where rates are heading, we believe investors can still generate 20-40 basis points of return over money market funds while remaining in a low-risk solution. In fact, adding low-risk exposure to complement higher risk strategies may be prudent diversification in this late stage of the credit cycle.

We seek to hit the ultra-short sweet spot by using a conservative credit approach that is active, liquid and diversified. Our Sterling Managed Reserves strategy leverages our Global Liquidity Money Market Funds’ approved-for-purchase list and risk framework, employing an active approach in general positioning and, importantly, in credit allocations. This means we are not forced to hold BBB rated securities if they are part of a benchmark.

We also focus on liquidity, with an average 60/40 ratio of money market securities to short-term bonds. This structure offers natural liquidity as securities roll off but also reduces price sensitivity because of the large allocation to commercial paper and other sub 12-month securities. We like these securities on the basis of their relative value and low duration.

Diversification through a blend of fixed income securities, ranging from money market securities to corporate bonds to mortgage-backed securities, is particularly important in a more volatile environment. These sectors behave differently during times of stress in the market, enabling access to various types of returns.

Sterling Managed Reserves: Enhance Income, reduce risk

With a strong track record throughout the interest rate cycle, our actively managed, sterling-denominated ultra-short strategy aims to generate incremental returns over money market funds, providing a potentially attractive solution for cash investors looking to maximise returns from their strategic allocations.

To find out more about this strategy, please visit www.jpmgloballiquidity.com or contact us at jpm_global_liquidity@jpmorgan.com

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