JPMorgan Asset Management portfolio manager Arjun Vijay stated that following a significant repricing of yields, global government bond duration is now at a fairly reasonable valuation.
"Market yields have completed a round of notable repricing, shifting from expectations of rate cuts to anticipating further tightening."
"At the same time, we believe real yields are likely to remain structurally higher than the levels of the past decade, driven by persistent fiscal deficits, the shift from quantitative easing to quantitative tightening, and elevated capital expenditure demand from artificial intelligence and infrastructure spending."
"Therefore, absent clear catalysts such as falling energy prices, further declines in core inflation, or a significant slowdown in economic growth, a large-scale selloff from current levels is unlikely, and a sustained bond bull market is also difficult to achieve."
"At current price levels, duration valuations are broadly reasonable. We see no sufficient reason to be significantly long or short duration."
"Instead, given our assessment that recession risk remains relatively low, our focus is on building high-quality spread income portfolios."
The fund favors opportunities in long-end bonds, with targets spanning U.S., Japanese, and Australian government bonds.
"Long-end rates are less directly affected by short-term energy volatility and are supported by improving technicals and positioning, so we prefer to add to long-end exposure when yields rebound."
The institution holds a more cautious stance on short-end bonds.
"In markets like Europe and the U.K., the number of rate hikes priced in by the market may ultimately exceed what central banks actually deliver, and we remain cautious about allocating heavily to short-end rate assets too early."
"As long as energy prices remain elevated, the appearance of cheapness in short-end assets may persist."
"Although the market has already priced in multiple rate hikes, we prefer a more tactical approach to trading short-end global government bonds."