FIXED INCOME
Finding new strategies
for uncertain markets
Three things to know about today’s bond market
1
Declining interest rates have
driven bond returns higher
for more than 20 years
In general, bonds prices move in the opposite direction of
interest rates, and that’s been good news for fixed-income
investors. For the past two decades, longer-term interest
rates have been steadily declining, sending prices on
existing bonds higher. But it’s a trend that can’t last forever,
and when rates do rise, bond investors could discover that
their portfolios contained more risk than they intended.
2
With today’s low yields,
rate increases could lead
to big losses
Because the income offered today in many bond market
sectors is so low, it could take years for coupon payments
to make up for the capital losses bondholders could suffer
due to rising rates. According to one study, in an average
rising-rate scenario (where rates rise 3% over about three
years), bondholders in the highest-rated securities could
lose more than 22% of their bond portfolios’ principal
value during that period.1
3
Stretching for income is a
risky proposition
Reaching for higher yields by investing in bonds with
longer maturities or lower quality ratings only compounds
the problem. Longer maturity bonds have a higher duration,2
which measures sensitivity to interest-rate changes. The
higher a portfolio’s duration, the bigger the loss it would
suffer in a rising-rate environment. Lower quality bonds,
on the other hand, are more sensitive to economic changes
and run a higher risk of default.
At today’s levels, interest rates can’t get much lower3
n 10-year U.S. Treasuries
n Effective federal funds rate
10
OCT 1997
MAR 2000
SEPT 2001
Asian
currency crisis
Tech bubble
bursts
September 11
terrorist attacks
8
DEC 2001, JUL 2002
Enron, WorldCom
bankruptcies
6
4
AUG–SEP 1998
Long-Term
Capital Management
collapse
MAR–MAY 2003
Iraq invasion
2
DEC 1998
President Clinton
impeached
0
1997
1998
1999
2000
2001
2002
Passive strategies have significant exposure to interest-rate risk4
n Duration (years)
n Expected price change (%) if rates rise 3%
20
10
8.90
6.00
0
–10
–20
–18.00
–26.70
–30
Bloomberg Barclays
U.S. Aggregate Bond Index5
2
n Recession
10-year U.S. Treasuries
1 “When Bonds Fall: How Risky Are Bonds if Interest Rates Rise?” Welton Investment Corporation, 2012. 2 Duration measures the sensitivity of the price of bonds to a change in interest
rates. 3 U.S. Department of the Treasury, Federal Reserve Bank of St. Louis, as of 3/31/17. For illustrative purposes only. The benchmark for short-term lending, the federal funds rate is
periodically set by the Federal Reserve Board and reflects the interest rate banks charge each other for overnight loans. 4 Barclays Capital, John Hancock Research, as of 3/31/17.
5 Prior to 8/24/16, the index was named the Barclays U.S. Aggregate Bond Index.
2003
MAR 2011
Tsunami hits
Japan
DEC 2009
European sovereign
debt crisis begins
AUG 2005
SEP–NOV 2008
Hurricane Katrina
OCT 2010
Lehman Brothers
bankruptcy, QE1
QE2
AUG 2011
MAR 2012
OCT 2014
Greece defaults
QE
purchases end
MAY 2013
DEC 2015
Fed’s tapering
comments
First Fed rate hike
in nine years
U.S. debt
downgraded
2004
2005
2006
2007
2008
Consider this:
U.S. Federal Reserve
balance sheet (in trillions)
$4.45
$0.93
2007
2009
2010
2011
2012
SEP 2012
NOV 2016
QE3
Trump elected president
2013
2014
2015
2016
2017
After more than seven years of near-zero interest rates,
the Fed has finally begun normalizing monetary policy.
The decision to increase short-term interest rates in March 2017 was
the latest move by the U.S. Federal Reserve (Fed) to wind down its
stimulative efforts, which had been in place since 2008. While the Fed
still has trillions of dollars on its balance sheet from its quantitative
easing programs, the message is clear: The era of easy money is
coming to an end. The question for investors is, how can I prepare my
portfolio for an environment of rising rates and less accommodative
policy from the Fed?
2016
Source: U.S. Federal Reserve, as of 12/31/16.
3
Look beyond the mainstream
for new opportunities
Over the past 20 years, during the four longest periods of broadly rising interest rates, U.S. Treasuries and core U.S. bonds were
among the worst performers. More specialized sectors, on the other hand, generally fared well, in part because they are less reliant
on declining interest rates to fuel performance.
Not all sectors of the bond market are dependent on declining rates to generate returns
Growth of $100,000 through various interest-rate cycles
JAN 2009–APR 2010
Periods of rising rates are highlighted below
Change in:
Fed funds rate
10-year U.S. Treasuries
OCT 1998–MAY 2000
Change in:
Fed funds rate
10-year U.S. Treasuries
$600,000
Change in:
Fed funds rate
10-year U.S. Treasuries
Best/worst returns:
500,000
+0.06%
+1.44%
Best/worst returns:
JUN 2003–JUN 2007
+0.69%
+1.85%
AUG 2012–DEC 2013
High-yield bonds
+4.03%
+1.66%
Change in:
Fed funds rate
10-year U.S. Treasuries
Best/worst returns:
49.16%
10-year U.S. Treasuries –6.46%
High-yield bonds
10-year U.S. Treasuries
Best/worst returns:
Emerging-market debt 19.58%
High-yield bonds
9.86%
10-year U.S. Treasuries –3.12%
10-year U.S. Treasuries
0.75%
400,000
300,000
200,000
100,000
75,000
4
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2
Source: Morningstar Direct, Stone Harbor Investment Partners, Western Asset Management Company, as of 3/31/17. Emerging-market debt is measured by the J.P. Morgan Emerging Markets Bond Ind
in the emerging markets. High-yield bonds are measured by the Bank of America Merrill Lynch (BofA ML) U.S. High Yield Master II Index, which tracks the performance of globally issued, U.S. dolla
tracks the performance of U.S. investment-grade bonds in government, asset-backed, and corporate debt markets. Mortgage-backed securities are measured by the Bloomberg Barclays U.S. Mortgag
Mae, Freddie Mac, and Fannie Mae. Floating-rate notes are measured by the S&P/LSTA Leveraged Loan Index, which tracks returns in the leveraged loan market and captures a broad cross section o
Short-term credit is measured by the Bloomberg Barclays Credit 1–5 Year U.S. Index, which tracks the performance of U.S. government and international, U.S. dollar-denominated, investment-grade
Index, a one-security index comprising the most recently issued 10-year U.S. Treasury note. The index is rebalanced monthly. In order to qualify for inclusion, a 10-year note must be auctioned on or
It is not possible to invest directly in an index. Past performance does not guarantee future results.
* The rising-rate periods included in the illustrations above are 9/30/98–5/31/00, 5/30/03–6/29/07, 12/31/08–4/30/10, and 7/31/12–12/31/13, the four longest periods of broad interest-rate in
Consider this:
Expand your fixed-income horizons
Not only have sectors beyond the mainstream tended to
outperform the broad-based Bloomberg Barclays U.S. Aggregate
Bond Index in ­rising-rate environments, today they generally
offer higher yields as well.
Annualized
return during
rising rates*
Yield
6.52%
5.82%
6.24%
5.97%
6.09%
5.17%
High-yield bonds
Debt issued by lower credit quality companies,
typically less sensitive to interest rates and
driven more by corporate fundamentals
–0.06%
+1.53%
9.68%
Floating-rate notes
–6.11%
2015
$576,736
Interest payments on these bank loans made to
corporations float along with interest rates,
paying higher coupons as rates rise
Emerging-market debt
$398,994
$279,850
$276,253
$275,547
$272,066
$257,829
Debt issued by governments and corporations
within developing economies, often buttressed
by strong demographic trends, such as growing
consumer classes
Bonds with shorter maturities are less sensitive to
rising rates since bondholders can expect to have
their principal repaid relatively soon
4.29%
Bloomberg
Barclays
10-year
U.S. Agg
U.S.
Bond Index Treasuries
2.21%
3.48%
2.90%
Core U.S. bonds
U.S. investment-grade bonds dominated by
government securities whose returns are driven
by rate movements
3.18%
2.61%
10-year U.S. Treasuries
Some of the most heavily traded securities in the
world, 10-year U.S. Treasuries are the de facto
proxy for intermediate-term interest rates
–3.75%
Floatingrate notes
–0.01
–0.44
High-yield
bonds
0.25
–0.23
Emergingmarket debt
0.60
0.22
Short-term
credit
0.68
0.30
Mortgagebacked securities
0.87
0.80
Core U.S.
bonds
1.00
0.86
2.39%
dex (EMBI) Global Diversified Index, which tracks U.S. dollar-denominated Brady bonds, loans, and Eurobonds of external debt instruments
lar-denominated high-yield bonds. Core U.S. bonds are represented by the Bloomberg Barclays U.S. Aggregate (Agg) Bond Index, which
ge-Backed Securities Index, an unmanaged index comprising 15- and 30-year fixed-rate securities backed by the mortgage pools of Ginnie
of the U.S. leveraged loan market, including dollar-denominated, U.S.-syndicated loans to overseas issuers and excluding those in default.
corporate bonds with maturities between one and five years. 10-year U.S. Treasuries are measured by the BofA ML 10-year U.S. Treasury
before the third business day before the last business day of the month. Bloomberg was added to the Barclays index names on 8/24/16.
ncreases during the past 20 years.
Correlation
Short-term credit
Income payments to these bonds are derived from
pools of mortgages, and as housing fundamentals
improve, the risk of defaults tends to decrease
2017
When it comes to building a
diversified portfolio, correlation
is one of the most important
gauges. Correlation measures
how similar the performance
of two investments has been
over time. Adding investments
with low or negative correlations
to a portfolio makes it more
likely to weather a variety
of market conditions.
10 years, as of 3/31/17
Mortgage-backed securities
2016
Not all bond market
sectors move in unison.
Source: Morningstar Direct, as of 3/31/17.
Correlation is a statistical measure that describes
how investments move in relation to each other,
which ranges from –1.00 to 1.00. The closer the
number is to 1.00 or –1.00, the more closely the
two investments are related.
5
Broadening your fixed-income portfolio
can help you avoid concentrated risks
Adding more types of fixed-income investments to your portfolio doesn’t necessarily mean taking on more risk. In fact, in the
example below, a broadly diversified bond portfolio generated more income and higher returns than an index-oriented portfolio
over the past 10 years, and did so with less volatility.
A diversified fixed-income portfolio produced higher returns with lower duration
Performance results
Traditional index-oriented portfolio
Diversified bond portfolio
10%
nCore U.S. bonds
10%
n Emerging-market debt
n High-yield bonds
n Mortgage-backed securities
100%
n Floating-rate notes
50%
10%
10%
n Short-term credit
10%
2.61%
3.51%
Average duration (years)
6.00
4.83
10-year annualized return
4.27%
4.96%
Standard deviation (over three years)
2.94
2.61
Ending value of $100,000 invested
10 years ago (rebalanced quarterly)
$151,969
$162,338
Income generation
Source: Morningstar Direct, as of 3/31/17. This is for illustrative purposes only.
6
Diversification does not guarantee a profit or eliminate the risk of a loss. Standard deviation measures performance fluctuation, may not be
­indicative of future risk, and is not a ­predictor of returns.
Fixed-income investments are subject to interest-rate and credit risk; their value will normally decline as interest rates rise or if an issuer is unable
or unwilling to make principal or interest payments. Investments in higher-yielding, lower-rated securities include a higher risk of default. Foreign
investing, especially in emerging markets, has additional risks, such as currency and market volatility and political and social instability. Liquidity—
the extent to which a security may be sold or a derivative position closed without negatively affecting its market value, if at all—may be impaired
by reduced trading volume, heightened volatility, rising interest rates, and other market conditions. Currency transactions are affected by fluctuations
in exchange rates. Frequent trading may increase fund transaction costs and increase taxable distributions. The use of hedging and derivatives could
produce disproportionate gains or losses and may increase costs. A portfolio concentrated in one sector or that holds a limited number of securities
may fluctuate more than a diversified portfolio. Loan participations and assignments involve additional risks, including credit, interest-rate,
counterparty, liquidity, and lending risk. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, and may be subject to
early repayment and the market’s perception of issuer creditworthiness. Absolute return funds are not designed to outperform stocks and bonds in
strong markets. There is no guarantee of a positive return, of the fund achieving its objective, or that volatility-reducing strategies will be successful.
Fund distributions generally depend on income from underlying investments and may vary or cease altogether in the future. Please see the funds’
prospectuses for additional risks. This material is not intended to be, nor shall it be interpreted or construed as, a recommendation or providing
advice, impartial or otherwise. John Hancock Investments and its representatives and affiliates may receive compensation derived from the sale of
and/or from any investment made in its products and services.
A range of fixed-income investment options
John Hancock Investments offers a diverse lineup of fixed-income funds designed to help investors pursue a range of goals, from
broad diversification to generating current income to protection from rising rates.
Average annual total returns as of 3/31/171 (%)
Expense ratios (%)
Net
Ticker 1 year 3 year 5 year Life of fund Gross (what you pay)
John Hancock Bond Fund
Class I (without sales charge)
Class A (without sales charge)
Class A (with 4.0% sales charge)
JHBIX
3.90
JHNBX 3.51
JHNBX –0.61
3.39
3.05
1.65
4.40
4.05
3.20
John Hancock Emerging Markets Debt Fund
JMKIX
JMKAX
JMKAX
13.07
12.73
8.24
4.81
4.42
3.00
4.56
4.19
3.34
John Hancock Floating Rate Income Fund
JFIIX
JFIAX
JFIAX
12.05
11.84
9.04
2.20
1.88
1.03
3.65
3.32
2.80
John Hancock Investment Grade Bond Fund
TIUSX
1.80
TAUSX 1.53
TAUSX –2.56
2.93
2.62
1.22
3.30
2.99
2.15
John Hancock Short Duration Credit Opportunities Fund
JMBIX
JMBAX
JMBAX
6.33
5.98
3.34
1.78
1.48
0.63
2.67
2.38
1.87
John Hancock Strategic Income Opportunities Fund
Ask your advisor
0.93
1.24
1.24
0.892
1.202
1.202
JIPIX
JIPAX
JIPAX
4.50
4.13
3.85
5.56
5.22
5.05
3.59
3.31
2.95
4.59
4.36
0.16
3.06
2.73
1.34
4.35
4.01
3.17
6.51
6.01
5.61
International exposure
Income potential
0.84
1.16
1.16
0.84
1.16
1.16
Protection from rising rates
Broad diversification
0.64
0.91
0.91
0.532
0.802
0.802
High-quality portfolio
Broad diversification
0.87
1.19
1.19
0.87
1.19
1.19
Income potential
Protection from rising rates
Broad diversification
4/28/06
Managed by John Hancock Asset Management
Class I (without sales charge)
Class A (without sales charge)
Class A (with 4.0% sales charge)
6.01
5.61
5.01
High-quality portfolio
Income potential
11/2/09
Managed by Stone Harbor Investment Partners
Class I (without sales charge)
Class A (without sales charge)
Class A (with 2.5% sales charge)
0.562
0.882
0.882
12/31/91
Managed by John Hancock Asset Management
Class I (without sales charge)
Class A (without sales charge)
Class A (with 4.0% sales charge)
0.61
0.93
0.93
1/2/08
Managed by Western Asset Management Company
Class I (without sales charge)
Class A (without sales charge)
Class A (with 2.5% sales charge)
7.49
7.36
7.26
1/4/10
Managed by John Hancock Asset Management
Class I (without sales charge)
Class A (without sales charge)
Class A (with 4.0% sales charge)
Broad diversification
11/9/73
Managed by John Hancock Asset Management
Investment goals
0.79
1.11
1.11
0.772
1.092
1.092
Income potential
International exposure
Protection from rising rates
Ask your financial advisor how fixed-income funds from John Hancock
Investments can help you better position your portfolio for today’s markets.
1 The inception date for John Hancock Bond Fund’s oldest class of shares, Class A shares, is 11/9/73. Its Class I shares were first offered on 9/4/01. The inception date for John Hancock
Investment Grade Bond Fund’s oldest class of shares, Class A shares, is 12/31/91. Its Class I shares were first offered on 7/28/03. Returns prior to these dates for John Hancock Bond
Fund and John Hancock Investment Grade Bond Fund are those of their respective Class A shares that have been recalculated to reflect the gross fees and expenses of their respective
Class I shares. The inception date for John Hancock Strategic Income Opportunities Fund’s oldest class of shares, Class NAV shares, is 4/28/06. Its Class A and Class I shares were first
offered on 1/4/10. Returns prior to this date are those of Class NAV shares that have been recalculated to reflect the gross fees and expenses of Class A and Class I shares. Effective
2/3/14, returns for Class A shares of John Hancock Bond Fund, John Hancock Emerging Markets Debt Fund, John Hancock Investment Grade Bond Fund, and John Hancock Strategic
Income Opportunities Fund have been adjusted to reflect the reduction in the maximum sales charge from 4.5% to 4.0%, for John Hancock Floating Rate Income Fund from 3.0% to
2.5%, and for John Hancock Short Duration Credit Opportunities Fund from 4.5% to 2.5%.
2 Represents the effect of a fee waiver and/or expense reimbursement through 9/30/17 for John Hancock Bond Fund and John Hancock Investment Grade Bond Fund,12/31/17 for John
Hancock Emerging Markets Debt Fund, and 12/31/18 for John Hancock Strategic Income Opportunities Fund, and is subject to change.
The past performance shown here reflects reinvested distributions and the beneficial effect of any expense reductions, and does not
guarantee future results. Returns for periods shorter than one year are cumulative, and results for other share classes will vary.
Shares will fluctuate in value and, when redeemed, may be worth more or less than their original cost. Current performance may be
lower or higher than the performance cited. For the most recent month-end performance, visit jhinvestments.com.
7
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back to 1862. Helping our shareholders pursue their financial goals is at the
core of everything we do. It’s why we support the role of professional financial
advice and operate with the highest standards of conduct and integrity.
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search the world to find proven portfolio teams with specialized expertise for
every strategy we offer, then we apply robust investment oversight to ensure
they continue to meet our uncompromising standards and serve the best
interests of our shareholders.
Results for investors
Our unique approach to asset management enables us to provide a diverse
set of investments backed by some of the world’s best managers, along with
strong risk-adjusted returns across asset classes.
Request a prospectus or summary prospectus from your financial advisor, by visiting jhinvestments.com, or by
calling us at 800-225-5291. The prospectus includes investment objectives, risks, fees, expenses, and other
information that you should consider carefully before investing.
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