The Endowus Insights team sits down with Andrew Headley, Managing Director, Portfolio Manager of JPM Income Fund and Head of Securitized Strategies within the Global Fixed Income, Currency & Commodities (GFICC) group at JP Morgan Asset Management. 

Despite recent volatilities, why do bonds make sense right now, and how does the JPM Income Fund allocate to capture income at present? With 30 years of experience in the investment industry, what lessons has Headley learned throughout his career? 

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New US administration policies and the economy in focus

Q: Given the mixed economic prints and escalating tariffs and retaliations expected, where are we in terms of macroeconomic conditions?

Headley: While there is a huge amount of volatility and uncertainty that has been injected into the equation lately, it is helpful to take a step back and talk about, “Where have we come from?” 

Firstly, the economy came into the US elections on a strong footing with increased stability in labour markets and price stability in terms of inflation, echoing the Federal Reserve’s dual mandate. While the Fed’s job had not been finished, there is a ton of progress to inch things closer to a zone where policymakers would be comfortable, suggesting that a soft landing for the US economy was delivered. 

After the election, it was not a complete surprise that President Trump was elected, as some of the polling numbers were showing some signs of that, perhaps prior to the election. But the “Republican sweep” was a surprise, with President Trump’s political party holding both the House of Representatives and the Senate. As investors, we have to think about President Trump’s policies and our interpretations in aggregate. 

At the margin, tariffs would ultimately make US manufacturing more competitive in the global construct. Ultimately, it might be negative for all manufacturing – both the US and non-US – to some extent. Government spending cuts, either through payroll reduction or less support in various spending programs, and limiting immigration would be seen as harmful for growth. 

As we take all of these in aggregate, we would have said it is still a pro-growth administration – some growth detractors may be offset by pro-growth policies. 

The magnitude, pace, and sequence of the US administration’s policies have implications

Now, in some ways, what surprised the market has perhaps been the sequencing of the policies. So far, President Trump is focused on using tariffs to balance global trade and on government spending cuts. Both initiatives are not helpful from a growth perspective. The market has also been surprised by the pace at which tariffs are implemented, and the magnitude of the proposed tariffs. What we have not seen yet is deregulation and tax cuts, against the expectations for a pro-growth administration. 

What the market is grappling with is that the uncertainty has just gone up in every part of the equation. For business management teams who are trying to think about how to manage their businesses, where to invest, and how much to invest, it's hard to do when clarity is lacking. For consumers, too. Notably, confidence around their ongoing employment status goes down, and consumers may soon start to pull back on their spending as well. I believe part of the solution to this is just to have some clarity or certainty that will allow people to plan more.

‍Editor’s note: The Liberation Day tariffs were announced on 2 April 2025 after the interview was conducted.

Q: Is the base case scenario an economic recession in the US, and how does it present risk to asset prices right now?

Headley: Coming into the year, we assigned the probability of a contractionary economic condition  – either recessionary or in crisis – to be at around 20%. When we met in New York for our quarterly strategy meeting in late March, we recognised that some of the frictional challenges caused by policy uncertainties had increased the probability of a recession to about 30%. 

Growth-wise, we had taken the probability of the above-trend growth scenario, like what we had experienced in the last three quarters of 2024, from 40% to 10% post-Trump’s victory.

Over the short-to-medium term, it is likely that the economy will see slow but positive growth, which presents a positive backdrop for fixed income and the JPM Income Fund. As consumer and corporate credit health remain on reasonably stable footing, demand for bonds will remain strong. 

Why long-term US interest rates are still climbing

Q: Why are long-term US interest rates still climbing, despite the three rate cuts by the US Federal Reserve?

Headley: It seems slightly counterintuitive that long-term interest rates have risen, at the same time as short-term rates have come down. There are three things that I would point to with regard to that.

First, when the Fed does a deeper cut earlier, that might mean that they have to do less later on. That's one element of what was happening: get those early and aggressive cuts done early to keep pace with the curve. 

More important than that, though, is the relationship between economic surprises and interest rates. They have tended to be fairly correlated over the last year or so. When the first 50 basis point cut was announced in Sep 2024, it came at a time when a lot of the economic data releases presented downside surprises, which added caution among investors. But, not long after that first cut, we actually started to go into the fourth quarter, where economic data started surprising to the upside again – that took away a little bit of the pessimism out of the market. 

Thirdly, one of the scenarios that we have been positioned for has been a re-steepening of the yield curve. There are a lot of things that feed into that view, certainly one of which is this idea that in a world where the need for both public and private sector debt funding is there and there should be more of a term premium priced into the yield curve. We have started to see the return of such, making it another reason why even as short-term rates have come down, long-term rates are going up.

Editor’s note: When governments and private companies issue debt, they increase the overall supply of bonds. If demand from investors does not fully absorb this supply, issuers must offer higher yields—particularly for longer-term bonds—to entice buyers. This increase in yield contributes to a higher term premium.

Balancing risk and return

Q: What is the objective of the JPM Income Fund?

Headley: For the JPM Income Fund, part of what we are striving for is to deliver a high yield bond-like yield, but with significantly lower volatility. One of the ways that we achieve that is through leaning into diversification. 

We always look across the entire investable spectrum of fixed income opportunities, and that includes corporate credit, both high-yield and investment grade, emerging markets debt, and government debt on a global level. It also includes various sub-sectors of the securitised markets. 

In addition to leaning into diversified risk premia, as we describe it, active sector rotation and exploring relative value opportunities can be important from both return and risk perspectives. 

Q: How’s the JPM Income Fund currently positioned, and how has the allocation evolved over the years?

Headley: Historically, we would have had allocations between about 20% and 40% in high-yield corporate bonds. Most recently, we have taken that position down to the lowest it has ever been, at about 17%. The reduction came before the noise and uncertainty that was injected into the economy because of tariff escalation.

The fundamentals for corporate credit health remained on pretty good footing. In aggregate, the quality of the high yield issue universe was about as strong as it has ever been. The technicals remain pretty good for high yield because the high yield market is shrinking as rising stars are getting lifted out of the high yield universe. Private credit has also become a competing source of funding against high yield companies. 

Our concern was just that spreads in the high yield market were on the tight end of the historical range, and that left us with more of an asymmetric profile on the potential spread changes in high yield. 

Another side of it was that, comparing corporate credit spreads – both high yield and investment grade – to comparable sectors within the securitised space, there are opportunities that we can take advantage of while being aligned with our risk framework.

We could either move out of an unsecured corporate bond and into the securitised space of a comparable risk profile to pick up meaningful amounts of spread. Or, oftentimes, we could look at selling something in the unsecured corporate space and investing in the securitised space with a similar spread but with meaningfully less risk. 

Editor’s note: As of the end of Mar 2025, the JPM Income Fund allocates 60% to the securitised market, which comprises agency, non-agency, commercial mortgage-backed securities, as well as asset-backed securities. 

30 years of experience 

Q: Lastly, what have three decades of experience in the investment industry taught you about personal investing? 

Headley: There are investment decisions that we as portfolio managers, in hindsight, might wish that something had been done differently. The important thing as an investor, and for someone who has been doing this for a long time, is to learn from experience. 

One of the examples I’d like to give is that, which was particularly acute in the Global Financial Crisis, investors who were willing to layer on additional risk beyond their risk appetites to maintain or even increase yield, even as the yields being offered by the market were receding. I witnessed investors who did one of two things to try to maintain that yield: they either used leverage or moved lower in the capital structure of their investable universe. 

Everybody hates volatility when it's to the downside. But when things are volatile and working for them, nobody cares about volatility as much. It takes a particular discipline to be able to say: “This is performing better than I would have expected. There’s something about that risk I need to rethink about what it means for my portfolio, or what my strategy is.” As bond portfolio managers, our goals are grounded in risk management and volatility targets. 

‍Q: Do you have any last words for our readers?

‍Headley: Now, thankfully, after the first seven years of the life of the Fund, where yields were receding, we have been moving back into an environment where income investing is a lot more fun and in an environment where income is more plentiful. That gives us a great starting point to deliver income for our investors.

This interview has been edited for length and clarity.