Weekly Review of Bond Yields and Bond funds
Chart 1: Bond Yields
Chart 2: YTMs on Riskier Bond Segments
Weekly Review – moderate rise in yields
Over the week ended 9 April 2012, the yields on most bonds rose moderately across the board, apart from Asian debt, which saw yields in the Asian High Yield segment and in the Asian Bond space fall -6.7 basis points and -2.4 basis points to yield 8.67% and 4.95% respectively. The worst performing segment was the US Investment grade corporate bonds, where yields rose 7.5 bps to reach 3.96%.
Currency Movement Dictated Returns
Even as most segments of the fixed income market delivered weak returns, volatility in currency markets continued to have a strong influence on bond fund returns. Against the SGD, the RMB gained 0.2% week-on-week (as of 5 April 2012), accounting for the majority of returns of funds invested in the China-H bond market such as United Renminbi Bond Fund USD which returned 0.3% for the week. The EUR posted a -1.7% week-on-week decline against the SGD, hurting returns of funds like the BNPPL1 Bd Best Selection Wld Em E-H EUR and Fidelity Eur HY AMDIST EUR, with losses of -2.5% and -2.3% respectively. With the AUD falling -0.7% against the SGD, funds such as Nikko AM Shenton Short Term Bond (A$) and LionGlobal AUD Short Duration Fund were negatively impacted, losing -0.8% and -0.4% respectively.
Bond Market Outlook
With debt jitters returning in Europe, yields across the European periphery rose last week as highlighted by Spain’s bond issuance which failed to bring comfort to investors as borrowing costs on their newly issued debt rose. Spain's issuance of 3 year bonds saw its yield rise to 2.89%, up from 2.44% in 15 March, with a lower bid-to-cover ratio of just 2.41x, down from 4.96x (a sign of lower investor demand). Similarly, Spanish 4 year bonds issued saw rising yields, with the yield rising to 4.32% from 3.38% in 1 March, while the bid-to-cover ratio fell to 2.46x from 2.59x. Investors have seemingly been worried about the effect on Spain's economy with the latest austerity budget as unemployment is expected to reached a staggering 24.3% from its current level of 23.5%, mainly due to expectations of a -1.7% contraction in the Spanish economy.
Meanwhile, monetary policy across the globe has not shown signs of tightening. In the US, the minutes for March’s FOMC meeting was released, indicating only a "couple" of members had advocated that "the initiation of additional stimulus could become necessary if the economy lost momentum" or if inflation looked likely to fall below its mandated 2% target. The difference in the number of members, although not specified, showed a relatively marked decrease from "a few members", with the market intepreting it as the Fed suggesting that QE3 was more than likely not on the cards. Despite the market's interpretation of the minutes, should employment growth turn sluggish and economic growth deteriorate later on in the year, the option could very well be exercised if adjudged to be needed.
In Europe, ECB President Mario Draghi rebutted the Bundesbank's (German Central Bank) calls for plans to exit the 'easy money' policies that the ECB has implemented. Draghi comments of "given the present conditions of output and unemployment, which is at historical high, any exit strategy talking for the time being is premature.” have signalled that the ECB is unlikely to withdraw its support to capital markets anytime soon, despite him keeping a close watch on inflation with remarks of "It also is important to keep in mind that all non-standard measures are temporary in nature and all the necessary tools are available to address upside risks to medium-term price stability in a firm and timely manner."
Currency risk remains a key consideration for bond fund investing (see “Income Investing Series: The Basics”). The ongoing volatility in currency markets has highlighted the importance ofcurrency risk management, and investors will do well to consider SGD-hedged classes or SGD-focused fixed income funds which are structured or managed to guard against unexpected losses due to currency depreciation against the SGD. Currently, hedging costs are minimal due to the low interest rate differential, while low yields available in the various fixed income segments coupled with strong currency market volatility are also reasons pointing investors towards SGD-hedged or SGD-focused fixed income offerings on the platform.
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: Eastspring Investments MIP 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]