Investors should raise their bond allocations, says JPMorgan’s head of global fixed income. Where he’s investing

10-year Treasury yield has traded in a 3.9%–4.3% range since September; JPMorgan AM CIO Bob Michele recommends rebuilding fixed-income allocations and is buying credit (investment-grade, high-yield, securitized) while remaining underweight Treasurys. The JPMorgan MBS ETF (JMTG) shows a 30-day SEC yield of 3.62% with a 0.24% net expense ratio; State Street reported $52 billion of bond ETF inflows in February. Michele cites tailwinds for agency MBS due to limited call optionality after the refinancing cycle and potential agency purchases (Trump directed up to $200bn in Jan), and highlights attractive EM local yields (~9% in markets like Mexico, Colombia, Brazil, Hungary, Romania, Poland).

Analysis

Securitized credit and agency MBS are the most interesting structural beneficiaries right now because demand can come from non-traditional buyers (banks, agency balance-sheet growth) rather than just retail mutual flows; that changes marginal supply/demand dynamics and can compress pick-up versus Treasuries without needing a benign macro backdrop. Private credit acting as a sponge for marginal borrowers is a two-edged sword — it props up public spreads near term by removing weaker paper, but it also concentrates credit risk outside of public default discovery, increasing tail exposure if growth softens.

The immediate policy and macro risks that would invert the trade are asymmetric: an inflation or geopolitical-driven shock that materially re-prices term premia would punish even high-carry securitized assets because duration and optionality exposure reasserts itself quickly; conversely, a steady path of central bank easing with banks allocating excess capital into agency MBS and ABS would mechanically tighten spreads and lift total returns. Timing matters — expect the next 3–12 months to be a window where carry dominates if growth holds; beyond 12 months idiosyncratic credit and refinancing cycles can reintroduce volatility.

Positioning should therefore be active and paired: express exposure to agency/securitized credit and select IG corporates while using rate hedges or duration shorts to protect against a shock. For emerging markets, prefer sovereign or local-note exposure in economies with credible disinflation dynamics and positive real yields, but size FX risk and use hedged/partially hedged structures.

The contrarian risk is that current public credit spreads understate systemic risk — private credit backstopping marginal borrowers is a delaying mechanism, not a cure; if growth slips, defaults could cascade into banks and higher-rated public paper, producing a rapid dispersion between securitized markets and raw corporate credit.

Key Decisions for Investors

• Pair trade (3–9 months): Long agency MBS ETF (JMTG) + short long-duration Treasury futures (e.g., TLT futures) sized to neutralize duration. Rationale: capture securitized carry and potential spread tightening while protecting against a rise in term premia. Risk/reward: modest carry with asymmetric downside if 10y yields spike; cap position size to 3–5% NAV and use stop-loss if 10y > +80bp shock.
• Credit spread exposure (6–12 months): Overweight IG corporates via LQD or CDX IG longs, funded by a partial Treasury hedge (buy IEF short TLT or use 7–10y note shorts). Rationale: earn spread compression if public market supply stays muted. Risk/reward: target ~200–400bp upside in spread tightening scenarios; protect with 3–6 month IG CDS buy if macro prints deteriorate.
• Emerging markets (12–24 months): Buy EMB (USD EM sovereign) or tactically EMLC (local currency EM debt) concentrated on Mexico/Brazil and Poland/Hungary via country ETFs, sizing FX exposure at 50% hedged. Rationale: high real yields with potential easing cycles; FX is the main risk. Risk/reward: expect higher carry with potential capital gains if disinflation persists; hedge sharp EM FX moves with options.
• Tail hedge (0–12 months): Buy 6–12 month payer swaptions on 10y swaps or TLT puts sized to cover core fixed-income allocation (cost ~ basis points of NAV). Rationale: inexpensive insurance against a rapid re-pricing of term premium from geopolitical/energy shocks. Risk/reward: premium cost reduces carry but protects portfolio from large rate spikes.