Bond allocation strategy in a high interest rate environment: creating stable cash flow and improving the defensive capabilities of the investment group

■Yang Shuwen

Since the beginning of this year, the global market has been facing constant challenges, ranging from geopolitical risks, concerns about inflation, to fiscal deficit issues in various countries. Under the interactive influence of multiple factors, the long-term government bond yields of major countries such as the United States, Japan, and Germany have reached highs. For investors, in the face of high interest rates and highly volatile markets, how can they enhance the defensive capabilities of their investment portfolio through bond allocation?

Major stock market returns so far this year

Uncertainty exists in the general economic environment and interest rate market fluctuations continue

The haze of inflation is hard to go away. As the conflict between the United States and Iran escalates repeatedly, crude oil prices remain high, and its impact gradually spreads to the real economy. Looking at the performance of the U.S. producer price index in August, companies continue to be under pressure from high oil prices, which in turn drives commodity inflation to accelerate. On the other hand, the closely watched U.S. labor market trends, recent relevant data show that the overall employment situation is resilient, while maintaining low hiring and low firings. The general economic data is mixed with bulls and bears, and the market continues to adapt to the high interest rate environment. Not only the stock market is under pressure from valuation revisions, but the bond market is also facing the impact of large-scale bond issuance by AI companies and expectations of central bank interest rate hikes. The market has re-priced interest rate trends.

The market attitude remains cautious, and funds are flocking to the bond market to seek opportunities.

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Observing changes in global capital flows, according to EPFR Global data cited by Bank of America Merrill Lynch, as of September 11, net outflows from U.S. stock funds reached US$14.2 billion in the past three weeks, and global stock funds also experienced a wave of withdrawals; global bond market funds attracted US$17.5 billion in the past week, showing that as yields rebound, market funds remain cautious and continue to flock to the bond market to seek income opportunities.

High interest rate environment: Make good use of bond allocation to create stable cash flow

The global monetary policy environment is tightening, and the market maintains the characteristics of high interest rates and continued volatility. For investors, how to balance market risks has become a top priority. Compared with stocks, which are highly volatile, bonds have features such as regular dividend distribution and return of face value upon maturity, which help provide a more stable source of cash flow. Investors can also diversify their allocation through bonds of different maturities and credit ratings, and use the "bond ladder" strategy to diversify maturity points, strike a balance between income, liquidity and risk management, and enhance the resilience of asset allocation. In practice, short- and medium-term investment-grade bonds are preferred as the core position. They can lock in interest rates and collect interest when interest rates rise, and can better resist the risk of interest rate disturbances. In addition, most credit bond spreads maintain a relatively low historical range, indicating that large enterprises have strong profit performance and no worries about their credit status. The market is not always clear. Moderate inclusion of bond assets will not only help capture interest income opportunities, but also enhance the resilience of the investment portfolio and calmly respond to changing situations.

(The author is the head of the Brokerage and Wealth Management Access Department of KGI Securities Company)

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