Presentation on theme: "FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Fixed Income dynamics: Understanding the world’s debt markets J.P. Morgan Investment Academy."— Presentation transcript:
1 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Fixed Income dynamics: Understanding the world’s debt markets J.P. Morgan Investment Academy
2 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Understanding the importance of fixed income securities in a portfolio 1 Two of every three invested dollars are held in the global fixed income markets
3 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Reviewing the fixed income landscape U.S. Treasury securities U.S. Treasury Inflation Protected Securities (TIPs) Build America bonds Zero Coupon bonds Municipal bonds Corporate bonds – U.S. and foreign Sovereign bonds – Bonds issued by foreign governments High Yield bonds – U.S. and foreign Fixed rate capital securities Certificates of deposit – U.S. and foreign Mortgage-Backed Securities (MBS) Commercial paper Fixed income derivatives, including: – Collateralized mortgage obligations (CMOs) – Structured notes – Forwards – Futures (e.g., Treasury bond, Treasury bill and Eurodollar futures) – Options (typically an option on interest rates) – Swaps 2 While fixed income includes many instruments, these are the major categories.
4 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Appreciating the appeal of fixed income BOND: Represents a loan from a bondholder to the bond issuer. The bond is essentially an “IOU note” from the issuer. COUPON: The interest rate stated on a bond when it is issued. PRINCIPAL: Original amount invested; the face value. 3 Investors prefer bonds because of the predictability of their value and income stream. A bond’s price may go up or down in value, but the maturity price is known, i.e. par (100).Most bonds have stated coupon rates and pay fixed payments semi-annually. Floating rate notes have coupons that are tied to an index and pay more frequently (monthly, quarterly), while zeros pay at maturity. Predictable future value At issue 120 110 100 90 80 Predictable income stream At maturity
5 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Premium Discount Buying at a premium versus at a discount BUYING AT A PREMIUM: The investor is paying more than a bond’s face value. BUYING AT A DISCOUNT: The investor is paying less than a bond’s face value. 4 Bond prices fluctuate with market conditions when traded on the secondary market. Par (face value) 110 100 90 Bond value
6 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Understanding bond yields YIELD: the percentage of income obtained from an investment (interest or dividend) relative to the value of the investment. 5 It is important to remember that when interest rates rise, bond prices fall. = Inverse relationship of yield and price. Interest rates Bond prices $ % Yield annual income current price /
7 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Factoring in maturity and average life MATURITY DATE: The date on which an investor’s principal amount will be repaid, along with the final interest payment. YEARS TO MATURITY: The number of years left until maturity. AVERAGE LIFE: Similar to maturity, but factors in prepayment speed and interest rate resets. 6 Bonds with the longest maturities tend to fluctuate the most with interest rate changes. Interest rates Bond prices $ % Short-term 1 – 3 yrs. Inter-term 3 – 10 yrs. Long-term 10+ yrs.
8 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Reading an original bond certificate 7 Though obsolete today, these highly decorative certificates included vital investor information. Maturity CouponPar ValueIssuer
9 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Evaluating multiple bonds 8 To help simplify your bond comparisons, there are several types of yield for mutual funds. 30-day SEC yield12-month yield OR dividend/distribution yield Definition Yield snapshot based upon the 30-day period ending on the last day of the previous month 12-month yield: Yield based upon the fund’s dividends paid in the most recent 12 months Dividend/distribution yield: Annualized yield based upon the most recent dividend payment Bottom lineFuture interest rate earned Historical past payments, distribution yield can be skewed because of large one time payments
10 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Using quality ratings to compare credit risk Standard & Poor’s, Moody’s and Fitch rate bonds on multiple factors: – Economy – Finances – Debt – Management 9 A bond’s quality rating is based on the strength of the issuer’s financial condition and ability to repay the investor. Standard & Poor’sMoody’sFitch Investment grade Highest qualityAAAAaaAAA Very high qualityAAAaAA High qualityAAA Medium qualityBBBBaaBBB Below investment grade Predominantly speculativeBBBaBB Speculative, low gradeBBB Poor to defaultCCCCaaCCC Highest speculationCCCaCC Lowest quality, not paying interestCCC In default, in arrears (interest payments have not been made), or of questionable value DDDD DD D Not ratedNR
11 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Measuring sensitivity to interest rate change Calculated in years, duration is a measure of a bond price’s sensitivity to a 1.00% change in interest rates. When interest rates change, bond prices change (rates increase, price decrease). Bonds with higher duration have more price volatility and will cause larger swings in portfolio valuation. Example: A bond with a duration of 4 years means that for a 1% increase in interest rates, the bond price will fall by 4%. 10 Duration is an important measurement when assessing a bond’s overall risk. Bond durationBond duration volatility 1 – 4 yearsShort; conservative 4 – 7 yearsIntermediate; moderate 7+ yearsLong; aggressive
12 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Assessing the impact of change 11 Rising or falling interest rates can significantly affect bond prices.
13 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Anticipating future interest rates 12 Currently at historic lows, interest rates are projected to rise over the next two years.
14 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Using the Morningstar style box to view bonds 13 Bonds with the highest quality and lowest risk are represented in the upper left quadrant. Safest Highest Risk Short Limited Intermediate Moderate Long Extensive Maturity/interest rate sensitivity High: AAA - AA Medium: A - BBB Low: BB - C Quality
15 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Looking beyond the U.S. markets Greater opportunity set More efficient portfolio diversification Potential for greater risk-adjusted returns 14 Source: Citigroup Non-USD World Government Bond Index, U.S. component of Citigroup World Government Bond Index.; TheCityUK Financial Markets Report, Oct. 2012 The global bond markets are vast and growing, and offer significantly more choices than the stock market. Internationally issued bonds have grown from 48% to 71% of the total fixed income market. 20121985
16 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Understanding investment risks Interest rate risk Credit, or default risk Reinvestment risk Currency risk (for foreign bonds) 15 Every investment has inherent risks — these are the most important to consider.
17 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Diversifying to minimize risk 16 Active, global investing provides a much larger universe of countries, sectors and issuers from which to generate returns and improve diversification.
18 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Summary A bond is an “IOU Note” from the issuer. Bonds have an inverse relationship with interest rates. When Interest rates rise, bond prices fall; conversely, when interest rates fall, bond prices go up. Bonds offer investors a predictable income stream and the potential for appreciation. Investor considerations: – Who is the issuer? Where is the issuer domiciled? – What is the quality of the bond and the financial health of the issuer? – What is the coupon rate? What is the issuer willing to pay me for this loan? – What does it cost? Are you buying a new issue at par, paying a premium in the secondary market or buying the bond at a discount? – When does it mature? Is it callable? 17
19 Thank you 18
20 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Disclosure The above commentary is intended solely to report on various investment views held by J.P. Morgan Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. © J.P. Morgan Chase & Co., July 2013 19
Download ppt "FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION Fixed Income dynamics: Understanding the world’s debt markets J.P. Morgan Investment Academy."
