Weekly Review of Bond Yields and Bond funds

Chart 1: Bond Yields

Chart 2: YTMs on Riskier Bond Segments

Weekly Review – poor week for high yield

Over the week ended 12 April 2012, the yields on most bonds fell as investors turned more risk-averse on ECB data showing an increased reliance on the ECB by Spanish banks. Debt worries once again reared its ugly head in Europe, with yields on Spanish rising by 6 basis points respectively to end at 5.820% (as of 12 April 2012). Prompting the market to worry over Spain were the ECB's details of the Long Term Refinancing Operations. Information gleaned from the ECB show that Spanish banks borrowed EUR 227.6 billion in March, nearly 50% more than February’s borrowing of EUR 150 billion. Meanwhile, credit default swaps (CDS) on 5 year Spanish debt have reached 480.57 and the 10 year spread over German bunds have reached 406 basis points (as of 12 April 2012), highlighting the perceived risk in Spanish debt as compared to German bunds.

As a result of weakened investor sentiment, the YTM on both US and Asian high yield bonds rose 11 and 5 bps respectively to reach 7.40% and 8.72% over the week, hurting performance of funds in the high yield space such as Fidelity US HY USD and Eastspring Investments MIP A which saw losses of -1.0% and -0.3% respectively.

Currency Movement Dictated Returns

Even as riskier 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 EUR gained 0.5% week-on-week (as of 12 April 2012), helping funds which are exposed to the euro deliver healthy gains - the ING (L) RF EM Debt HC X EUR Hedge and BNPPL1 Bd Best Selection Wld Em E-H EUR delivered returns of 1.4% and 0.9% over the week. The AUD posted a 0.9% week-on-week gain against the SGD, boosting the returns of funds like the LionGlobal AUD Short Duration Fund and Nikko AM Shenton Short Term Bond (A$) which offer exposure to the Australian dollar. The volatility in currency markets also hurt funds with strong active currency positioning, like the FTIF-Templeton Glb Total Ret A(mdis) SGD-H1 which had a short position in the euro (against the USD, as of end March 2012), and a long position in the Australian dollar.

Bond Market Outlook

With European debt woes returning to plague the market following a relatively quiet 3 months on the continent, safe segments of fixed income have benefited as indicated by the yield on G7 bonds and Global bonds which fell by -4.9 bps and -6.3 bps to reach 1.032% and 2.388% respectively (as of 12 April 2012). We continue to advocate investors maintain exposure to both the safer segments of fixed income for stability, as well as the riskier segments of fixed income, which have the potential to significantly enhance the yield on one’s portfolio.

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 of currency 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]