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 19 April 2012, bond yields continued to fall, driving performance of the fixed income market. Some of the better-performing fixed income funds over the week like the Eastspring Investments MIP A (+0.4%) and Fidelity US HY AMDIST USD (+0.5%) are invested in the high yield space, while the PIMCO Emerg Mkt Bd Cl E SGD Hed which delivered returns of 0.4% week-on-week provides exposure to emerging market debt.
SGD-hedged classes of fixed income funds outperformed, following the MAS’ announcement of further appreciation for the SGD against a basket of unnamed currencies. The USD declined -0.2% against the SGD, while the EUR posted a -0.6% decline. The AUD was particularly weak, logging a -1.3% loss against the SGD, hurting the performance of the LionGlobal AUD Short Duration Fund and Nikko AM Shenton ShortTerm Bond(A$).
Bond Market Outlook
Despite a recent revival in Eurozone debt concerns and rising peripheral bond yields (see “Bonds Weekly: European Worries Return [12 April 2012]”), Spain and France held successful bond auctions last week, raising 2.5 billion euros and 7.97 billion euros respectively. While Spain’s 10-year bonds were issued at 5.743%, up from 5.403% in February, demand was 2.4 times supply, while the bid-to-cover ratio for the 2-year bonds on offer was 3.3. The successful bond auctions highlights that capital markets remain open to beleaguered Eurozone borrowers (albeit at a higher cost), and suggests greater confidence in the ability of Eurozone nations like Spain to ride out the current crisis.
In a move seen by many as a small step towards the eventual liberalisation of the RMB, the People’s Bank of China (PBoC) doubled its currency’s daily trading band, which will allow the RMB to trade up to 1% above or below the daily official rate against the US dollar, double the previous range of 0.5%. This sets the RMB on a slightly different appreciation roadmap, which involves a slower pace of appreciation with the allowance for higher currency volatility. The policy came into effect on 16 April 2012; although the RMB depreciated against the US dollar that day, it didn’t trade outside of its old trading band of 0.5%. As of the end of the week, the RMB has remained basically flat against the US dollar, compared to a week ago. Investors looking at the RMB as a “one-way” (appreciation-only) investment may wish to consider that there are also downside risks; the RMB has depreciated by -3.5% against the SGD (as of 19 April 2012) on a year-to-date basis.
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. 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]