Fixed Income Diversification: Seek Opportunities, Watch Risks

Pilar Gomez-Bravo looks at expanding opportunities across the emerging markets space.

The world of fixed income has grown exponentially from being a market that's focused on US bonds and US dollars to being a global market with exposures in different asset classes that also exhibit different risks.

And we've seen expanding fixed income opportunities across the emerging market space, the high-yield space, all the way up to AAA rated securities. And the reason why you get benefits is because …these asset classes within fixed income behave differently in the same market environment.

What we want to do when we build a fixed income portfolio that is diversified and therefore gives you the best risk adjusted experience is really to provide you with asset classes within fixed income that are not highly correlated. And so for example, US treasuries and global government bonds and municipals might be quite highly correlated with interest rates. And yet, high yield in an emerging markets have very low levels of correlation. So adding these two components of fixed income can actually give you a better experience as an investor by diversifying risk away and still give you that income and that stability experience that you want from your fixed income asset class.

By adding complexity to your fixed income universe, you could potentially add risk as well and so you have to be very mindful when you're constructing your fixed income exposures to understand the additional risks that you may be taking by expanding the universe from a domestic one to a global one.


The views expressed in this commentary are those of Pilar Gomez-Bravo and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any other MFS investment product.

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