Chart of the week: diversification tames Euro Aggregate Bond Index volatility

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The Euro Aggregate Bond Index has exhibited notable stability over the past three years, despite significant volatility across individual bond segments. This stability underscores the meaningful diversification benefits inherent in the index.

During this period, short-duration bond yields, represented by instruments such as the 2-year German government bond, experienced substantial volatility due to chronic economic weakness in Europe’s core, pushing ECB rates and short-maturity yields lower. Conversely, longer-duration bonds, like the 30-year German government bond, faced upward yield pressures driven by increased deficit spending. Additionally, euro corporate bonds experienced volatility as disinflationary trends initially compressed credit spreads, which subsequently widened amid rising risks from potential trade wars and broader geopolitical tensions.

Meanwhile, bond markets in the US and other regions experienced even greater volatility. For euro-based investors, currency fluctuations added an additional layer of risk, further amplifying overall volatility. In this context, the relative stability of the Euro Aggregate Bond Index stands out. By encompassing both corporate and sovereign bonds across a broad maturity spectrum, the index effectively balanced these diverse sources of volatility. Its diversified composition enabled it to trade within a much narrower range, providing investors with more consistent returns and reduced volatility.

For investors targeting lower volatility and steady performance, this index highlights the clear advantages of diversification, aligning well with our strategic approach to actively seeking opportunities for outperformance.