Weekly Review of Bond Yields and Bond funds
Chart 1: Bond Yields
Chart 2: YTMs on Riskier Bond Segments
Weekly Review – Riskier Bonds Outperform
Over the week ended 3 May 2012, yields declined noticeably across several categories. The high yield, investment grade debt, and emerging market debt segments were the week’s best performers as yield’s declined sharply in these segments on the back of volatility in equity markets. The yield on Asian high yield bonds declined -53.7bps to 7.989%, while US high yield bonds saw a -20bps decline in yields to 7.01%. Yields also declined in the investment grade and hard currency emerging market debt segments, with their respective yields falling -12.37bps and -13.66bps to reach 3.753% and 4.719% respectively.
The SGD depreciated against several major currencies, losing 0.25% and 1.25% respectively against the USD and JPY. Correspondingly, funds with exposure to the segments which outperformed, and which had underlying exposure to the USD and JPY were the week’s biggest gainers. BNPPL1 Bd Best Selection Wld EM USD returned 1.52% and Fidelity EmerMktDebt A-SGD rose 1.46%, with the 2 funds benefiting the most from both segment and currency exposure.
Bond Market Outlook
The Reserve Bank of Australia (RBA) announced a cut in the benchmark interest rate by 50 basis points to 3.75%, the largest reduction in 3 years. The magnitude of the cut surpassed market expectations, causing the AUD and local bond yields to drop significantly after the announcement. Despite the rate cut, borrowing costs in Australia is still the highest among major developed countries. Governor Glen Stevens stated that after interest rate cut, the current level is an appropriate borrowing rate.
Apart from lowering benchmark interest rate, Stevens aims to tackle the problem of running a deficit for 4 years by reducing government spending whose amount is equal to 2.5% of GDP. However, the action will hurt the overall economy and increase the unemployment rate, while the coming inflation rate will be expected to fall within the range of 2% to 3% of targeted inflation as set by the RBA. The RBA has cut the estimate of economic growth and inflation because of poor job and housing markets. According to the latest central bank’s estimate, the average economic growth in Australia will be 3% in 2012, down from its February estimate of 3.5%. The inflation pressure will be relieved that underlying inflation in 2012 is estimated to be 2.25% compared to the previous forecast of 2.75%.
The unexpected rate cut sent the AUDSGD rate falling by -0.95%, causing funds such as LionGlobal AUD Short Duration Fund and Nikko AM Shenton Short Term Bond Fund (A$ Hedged) to end as the week’s worst performers, losing -0.89% and -0.76% respectively.
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]