Weekly Review of Bond Yields and Bond funds

Chart 1: Bond Yields

Chart 2: YTMs on Riskier Bond Segments

Weekly Review – Riskier bonds outperformed, EUR strengthened 

Over the week ended 9 February 2012, riskier bonds outperformed as their yields continued to decline. Asian high yield bonds saw the sharpest decline in yields (-26.3 bps) to 9.078%, while US High Yield recorded a -15 bps decline to 7.38%. Both hard currency and local currency Emerging Market bonds saw declines in yields to 5.21% and 6.18% respectively. In the safer segments of the bond market universe, G7 bond yields rose 5.1 bps to 1.02% while US investment-grade corporate bonds saw yields holding relatively steady at 4.29%.

While our recommended high yield bond funds like Fidelity Asian HY AMDIST SGD-Hged and PRU Mthly Income Plan Cl A delivered strong week-on-week performances of 1.1% and 0.7% respectively, the strength of the euro against the SGD saw funds which target returns in EUR terms outperform over the week ended 9 February 2012. As the euro gained 1.2% vis-à-vis the SGD, funds like the Parvest Conv Bond Europe EUR, Fidelity Eur HY EUR and BNPPL1 Bd Best Selection Wld Em E-H EUR all delivered returns in excess of 2%.

Bond Market Outlook

Major central banks kept rates on hold in February, with the ECB and BOE maintaining key benchmark rates at 1% and 0.5% respectively. The Reserve Bank of Australia (RBA) also surprised the market by keeping its benchmark cash target rate at 4.25% (the consensus forecast was for a 25 bps cut to 4%) as the RBA cited improving conditions in the US and China. The Australian dollar posted a healthy advance in response to the RBA’s announcement, with the AUD posting a week-on-week gain of 0.8% (as of 9 February 2012) against the SGD.

In Europe, Greek debt concerns eased somewhat as the government approved a debt deal which will see the country embark on a series of austerity measures in exchange for the next tranche of bailout funds. On the back of improving investor confidence, the euro appreciated by 1.2% against the SGD over the week ended 9 February 2012. Italian bond yields have also fallen in tandem with the improving sentiment; as of 13 February 2012, the 10-year Italian government bond now yields 5.563%, down substantially from the 7.108% at the end of 2011.

In the current environment, developed sovereign bond yields (with the exception of selected European countries) remain low by historical standards, an indication of poor low-term returns to be expected in the segment. Much higher yields may be found in riskier segments of the bond market (high yield, emerging market debt), although these come with higher associated risk. We retain a preference for these higher-yielding segments, and would encourage investors to select SGD-hedged or SGD-focused fixed income funds which enables investors to guard against unexpected losses due to currency depreciation.

Recommended Fixed Income Funds:

Bonds – Asia: United Asian Bond Fund SGD
Bonds - Designated Parking Facility: Nikko AM Shenton ShortTerm Bond(S$)
Bonds – Global: DWS Lion Bond Cl A
Bonds – Global: FTIF-Templeton Glb Bond A(mdis) SGD-H1
Bonds – Global Emerging Markets: United Emerging Markets Bond Fund
Bonds - High Yield: Fidelity Asian HY AMDIST SGD-Hged
Bonds - High Yield: PRU Mthly Income Plan Cl A
Bonds – Singapore-Centric: LionGlobal Spore Fixed Inc-A
Bonds – Singapore-Centric: United SGD Fund  

[Our current list of recommended fixed income funds are either managed from an SGD perspective, or are hedged to the SGD]