Global Insights Gleaned from the World Bond Index Report
The FTSE World Government Bond Index (WGBI) has experienced a series of significant changes over the past few years, with rising interest rates leading to a transition towards higher yields and lower bond prices. This shift has made the last three years some of the weakest in terms of performance for the index.
In US dollar terms, the return on bonds with a maturity of 1-3 years stands at 6.1%, while there is a 3.3% loss for bonds with a maturity of 20 years or more. This trend is reflected in the steepening of the WGBI's yield curve, indicating that investors with longer-dated bonds are demanding higher yields.
The US government recently reached its 'Debt Ceiling', the maximum amount of money the country can legally borrow. This development, coupled with increasing debt-to-GDP ratios, has raised concerns about the US economy's future stability.
The WGBI, a global standard for sovereign debt markets, has seen a decrease in the percentage of triple A-rated bonds. In 1984, all bonds in the index held this top rating, but this figure has dropped to 11% currently.
FTSE Russell, a leading global provider of benchmarks and indices, manages the WGBI. The index is used to benchmark investment performance and create various financial products, including investment funds, ETFs, structured products, and index-based derivatives.
In recent years, older, weaker correlations between equities and government bonds started to reassert themselves. The correlation of returns between these two asset classes has become much stronger, reaching 0.8 and 0.9, after years of low or negative correlation.
However, the correlation between high-yielding corporate debt and equities remains traditionally higher. On the other hand, the overall correlation between fixed income and equity has mean-reverted to around 0.4.
The re-emergence of diversification does not necessarily mean the 60/40 model is back in play, but the portfolio diversification attraction of fixed income has returned, according to Robin Marshall. The FTSE Debt Capacity World Government Bond Index, a variant of the original WGBI, has a lower weighting for the US compared to the main WGBI.
The increased focus on debt-to-GDP ratios has led to concerns about whether countries will be able to grow enough to pay their coupons. In response, governments have issued more shorter duration bonds, where repayment risk is lower.
Despite these challenges, government bonds with yields in the 4-5% area remain attractive to income investors. Additionally, adding gold and digital assets to a portfolio can improve performance, according to FTSE research.
Defined benefit (DB) pension schemes have moved into a funding surplus after 20 years of deficits, thanks to higher yields. Higher yields lead to a decrease in the present valuation of liabilities for DB schemes.
In conclusion, the global bond market has undergone significant changes in recent years, with rising interest rates, increased debt-to-GDP ratios, and shifting correlations between various asset classes. However, opportunities for income investors remain, particularly in government bonds with higher yields.
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