For bond markets, a heavy debt burden is among prominent risk factors

Risk management is at the forefront of everything we do for investors, from assessing current conditions for fixed income assets, to making risk-aware investment decisions. We aim to maintain portfolios balanced enough to cope with today’s unique sources of market stress. In the following slides, we examine several sources of such stress, focusing on risks such as those related to the high levels of debt accumulation around the world.

Taken together, these slides offer a snapshot of The Great Risk Rebalance series, which explores key risks facing fixed income markets today.

How U.S. debt accumulation has grown, from Treasurys to emerging markets

Since 2007, stimulus policies have fueled a surge of debt consumption across the globe, exacerbating borrowing that had begun many decades earlier. It follows that global economies are now feeling the weight of these debt loads. In their willingness to borrow aggressively, they are taking part in a long, intense period of debt accumulation known as a debt supercycle.

Source: Securities Industry and Financial Markets Association

The debt supercycle: Why does it matter?

The debt supercycle: Why does it matter?

The significance of the cycle has to do with an issue that all investors must contend with: the presence of risk. For the most part, we think markets may have underappreciated some of the risks that accompany the debt supercycle, which include:

  • compromised liquidity
  • persistently low inflation
  • slower economic growth.
Front and center: Liquidity risk

Front and center: Liquidity risk

In our opinion, liquidity risk is among the more pressing issues for investors — particularly bond investors. Unlike equity markets, which can rely on computerized exchanges to bring buyers and sellers together anonymously, bond transactions still largely depend on person-to-person relationships. Trades are conducted directly between parties, relying on dealers to facilitate the transfer of ownership. But in the past few years, major bond dealers have been keeping markedly lower inventories of securities, which can result in limited trading volumes and has contributed to pockets of thin market liquidity. The charts on the following slides help visualize what has transpired.

Primary dealer positions
have dwindled
Resulting in lower trading
Primary dealer positions have dwindled

Primary dealer positions have dwindled...

Data: Federal Reserve Bank of New York

Trading volumes are down

...And trading volumes are down

Data: Securities Industry and Financial Markets Association

The complications of low inflation

The complications of low inflation

Swollen levels of debt eventually crimp spending, leading to bouts of low inflation. Persistently low prices mean that businesses and investors can’t rely on economic growth to lift returns on their investments; nor can they rely on such growth to boost their ability to service debt.

Data: Bureau of Economic Analysis, via Federal Reserve Bank of St. Louis.

Index definition
The side effects of globalization: Risk of contagion

The side effects of globalization: Risk of contagion

Debt addiction has not been isolated to one country or economic region. The linkages provided by globalized markets have increased the likelihood of contagion, such that asset prices often move with high degrees of correlation around the world.

Data: MSCI, via Lipper

Index definitions
The side effects of globalization: Slower growth is pervasive

The side effects of globalization: Slower growth is pervasive

Also, the reality is that slow economic growth is tamping down economies throughout the world.

Data: Bloomberg. The growth trends charted above are based on values for each country’s Now-Casting Index, which is published by Now-Casting Economics. The index is normalized to have a mean value of 100; values above 100 signify that growth is above average, while values below 100 signify that growth is below average.

For now, a focus on managing risk

For now, a focus on managing risk

It is difficult to predict when and how the debt supercycle, and its attendant risks, will lose their influence on securities markets and economies around the world. There is no playbook to follow, but we believe investors are best served by managing risk and focusing on capital preservation. Credit risk, for instance, should be among the key concerns, keeping in mind that a defensive approach — one that focuses on generating stable income, for example — may be more prudent than relying on price appreciation as the primary driver of returns.

Launch slideshow

Charts are for illustrative purposes only.

The views expressed represent the Manager's assessment of the market environment as of July 2016, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting or calling 800 362-7500. Investors should read the prospectuses and the summary prospectuses carefully before investing.


Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Fixed income securities (including asset-backed notes such as mortgage-backed securities) can lose value, and investors can lose principal, as interest rates rise. These types of securities may also be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on the debt.

Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

International investments entail risks not ordinarily associated with US investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

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