Why Bonds Are Back in the Spotlight: A Strategic Rebalancing Call
Amid geopolitical tensions and market volatility, a prominent fixed-income strategist is issuing a clear directive: investors should be rebuilding their bond allocations. Bob Michele, Chief Investment Officer and Head of Global Fixed Income at JPMorgan Asset Management, argues that current yield levels present a compelling opportunity, even as headlines focus on oil price surges and conflict in the Middle East.
“We’ve been buying the bond market,” Michele stated, emphasizing its role as a critical diversifier and counterbalance to equity portfolios. His perspective is grounded in recent market performance; despite the 10-year Treasury yield ticking higher, it has remained within its September range of 3.9% to 4.3%. More importantly, credit markets have demonstrated resilience, with concerns largely isolated to private credit segments.
The Equity Overweight Problem
Michele’s call is driven by a pronounced structural imbalance in investor portfolios. After years of robust stock market rallies—fueled significantly by enthusiasm around artificial intelligence—equity allocations have ballooned. The S&P 500 gained over 20% in both 2023 and 2024, with a 16% rise in 2025 (year-to-date as of the commentary). This sustained growth has left many institutional and wealth management clients “so underweight and under-allocated to fixed income,” a situation Michele, with decades of experience, finds unusual.
“For me, having done this for a long time, I can’t remember both the institutional side and the wealth management side being so underweight,” he noted. This lopsidedness creates a strategic need for rebalancing toward fixed income, not just for yield, but for true portfolio diversification and risk mitigation.
Where the Money is Flowing: Data Confirms the Shift
Michele is observing the early stages of this reallocation. “You see these constant inflows into various bond vehicles,” he said, as investors seek to diversify from appreciated equity and alternative holdings. This trend is substantiated by external data. State Street Global Advisors reported that bond ETFs attracted $52 billion in inflows in February 2025, marking the second consecutive month above $50 billion—a first for the asset class. Strategist Matthew Bartolini highlighted this in a February 28 note, signaling a meaningful institutional shift.
JPMorgan’s Strategic Bond Picks: Credit and Securitized Assets
Michele and his team are deploying capital across specific segments of the credit market, maintaining an underweight stance on Treasurys. Their focus includes:
- Investment-Grade and High-Yield Corporates: They view current credit spreads as “fair” given an environment of positive economic growth, a Federal Reserve that has cut interest rates, and a private credit market that has absorbed marginal borrowers.
- Agency Mortgage-Backed Securities (MBS): This is a standout conviction. Michele points to the massive refinancing cycle that has locked borrowers into low rates, reducing prepayment (“call”) optionality and improving the securities’ convexity. He anticipates increased demand from government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, following President Trump’s directive for them to purchase up to $200 billion in agency MBS. Potential future bank buying, spurred by deregulation and excess regulatory capital, adds another layer of potential support. The JPMorgan Mortgage-Backed Securities ETF (JMTG) exemplifies this opportunity, offering a 3.62% 30-day SEC yield with a 0.24% net expense ratio.
- Selected Emerging Markets: Michele is attracted to countries with high real yields and disciplined monetary policy. He specifically named Mexico, Colombia, and Brazil in Latin America, and Hungary, Romania, and Poland in Eastern Europe. “Suddenly you’ve got a portfolio that yields about 9%,” he said, describing a high real yield in markets where central banks are likely to ease policy. This combination of yield and potential capital appreciation is particularly appealing.
The Bigger Picture: A Risk-Off Home with Yield
Michele’s overarching thesis does not rely on forecasting a recession. Instead, it hinges on the portfolio construction benefits of fixed income in the current cycle. Bonds provide a proven “risk-off” asset that can cushion portfolios during equity pullbacks. With yields at attractive levels relative to history, the opportunity cost of holding cash or being underweight bonds is significant, especially for investors who have missed the fixed-income rally of recent years.
“It does give you a risk-off home, and we’ve been buying credit because we don’t forecast a recession on the horizon,” Michele summarized. His advice underscores a timeless investment principle: diversification across asset classes is essential, and the time to rebalance is often when it feels most contrary to the recent market narrative.
