Weekly Review of Bond Yields and Bond funds

Chart 1: Bond Yields

Chart 2: YTMs on Riskier Bond Segments

Weekly Review – Safer Segments Rise on Europe

Over the week ended 10 May 2012, risk aversion saw the yields of bonds in the safer segments decline, while riskier segments saw their yields rise. The safer segments of global bonds and SGS saw their yields fall by -3.2bps and -1bps to reach 2.276% and 0.98% respectively, while G7 bonds fell -3.7bps to reach 0.95%, as investors fretted over the on-going political turmoil in Europe.

The risk aversion led to the previous week’s winners surrender some of their large gains. The yields on Asian high yield bonds rose 15.3bps to 8.142% and emerging market debt (hard currency) rose 8.68bps to yield 4.807% while local currency debt rose 8.4 bps to reach 6.331%.

The SGD had a mixed week against the major currencies, losing -0.5%, -0.8% and -0.1% respectively against the USD, JPY and RMB. The SGD rose against the EUR and AUD by 1.2% and 1.3% respectively. 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 while funds exposed to the EUR and AUD were hampered by the appreciation of the SGD. Schroder ISF Glb Co Bnd A Acc USD returned 0.7%, Fidelity USD Bd USD, PIMCO Total Return Bond Cl E USD and United Global Bond SGD gained 0.6%, benefiting from a stronger USD and exposure to government and G7 bonds.

Bond Market Outlook

Turmoil in the Eurozone once again overtly influenced bond markets, sending investors scurrying into the safer segments of fixed income, and away from Euro debt and riskier segments of bonds such as high yield and emerging market debt. The rush to quality has seen yields on traditional safe havens such as 10 year US treasuries, UK Gilts and German Bunds reach 1.867%, 1.987% and 1.539% respectively. with 10 year Bunds at all time historic lows, and the US 10 year Treasury approaching the lows it reached last year, we continue to favour the riskier segments of fixed income due to the extremely low yields to be found in global bonds.

In the periphery, Spanish sovereign yields rose over the week, with the 10 year debt rising to 5.992% while spreads between Spanish and German 10 year debt rose to over 3.657% in midweek, its highest point since the creation of the Eurozone as investors worried over the potential bailout of the Spanish banking sector, Spanish sovereign yields could continue its rise.

In monetary policy, the Bank of England decided not to enhance its asset purchase program despite the nation UK two consecutive quarters of negative GDP growth, as rising inflation has seemingly restricted the prospects of further monetary easing.

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]