Bonds have traditionally played the diversifier role within portfolios, offsetting the historically greater volatility of stocks. That worked well as long as bond and stock performance was poorly correlated. But recently, there have been periods of time in which bonds and stocks moved in sync, raising questions about how bonds can best serve investors in today’s market environment.

Reine Bitar, a Senior Portfolio Manager with Amundi in London, England, continues to believe in the diversification benefits of holding bonds. She watched closely as the fiscal outlook came back into focus for fixed income markets, following an unexpected German fiscal package earlier this year and ongoing U.S. tax-cut discussions.

“This sort of shock raises risk premium in the long end of the curve, resulting in steeper curves. It also weakens the safe haven role of bonds…as a hedge against stocks,” she says. “However, we think this is nothing new. The market focus on fiscal does go through waves, and we believe bonds still offer value, particularly in a risk-off environment.”

Bonds are currently characterized by very attractive yields, she adds, and she sees an opportunity to add value through diversification by geography and sector. In April, for example, German bonds played the safe haven role as investors moved money away from U.S. bonds and Treasury bills. This suggests that carefully chosen bonds can still fulfill their traditional role in a portfolio.

Finding opportunities in volatility

Bitar is a lead manager of the NEI Global Total Return Bond Fund, which follows a “discretionary global macro investment approach” that starts with an assessment of global growth, inflation, and financial conditions. The portfolio is then filled with liquid, diversified government and corporate bonds based on medium-term views around duration, credit, and currencies. Most of the corporate bonds are investment grade, but there is also a small allocation to high-yield and emerging market bonds.

Importantly, this is an actively managed fund — something that has proven its merit in recent turbulent months. As volatility shakes up markets and reveals opportunities, the team has the flexibility to deviate from the benchmark and capture value wherever it appears. Active management has also been critically important to manage risk through the ups and downs.

“Our strategic investment approach has not changed this year,” says Bitar. “What has changed is our shorter-term management approach, which has been much more focused on diversification, risk management, and options overlays.”

Following U.S. President Donald Trump’s election, the Amundi team decided it wouldn’t help to try to time or predict what he might do or say. Rather, they remained focused on their conviction views and managed risk around them.

“Back in January, we started buying U.S. duration and selling the U.S. dollar in an options format, as we thought that the U.S. exceptionalism theme…was looking vulnerable to reversal,” she says. “We hedged our positions, and we ended up being right on the hedges and benefited a lot from the options positions.”

At the same time, the fund leaned into diversification, buying duration across developed and emerging markets, including Brazil, Mexico, and Poland.

Volatility in response to on-again, off-again tariffs has opened up value in corporate bonds, and the fund responded by increasing its exposure to corporates. It also selectively took profits on U.S. dollar shorts in response to the U.S. dollar sell-off in the spring, while tactically buying the U.S. dollar at a lower price. One of the fund’s biggest overweight positions is in UK government bonds, where premium has built up on the back of fiscal scares and sticky wage inflation. Bitar says UK government bond yields look particularly attractive at their current levels.

“We continue to be overweight duration on the fund overall, and we favour international diversification into both developed and high-quality emerging market bonds,” she continues. “The beauty of the flexibility of the NEI Global Total Return Bond Fund is that we remain very nimble and very quick to take profit.”

She says that, despite shadows on the horizon looking ahead to the summer and the rest of the year, “volatility creates opportunity, [and] we look forward to hopefully being able to benefit from opportunities that will come…because we still have a lot of room to maneuver in the fund.”