Weekly Review – More Easing On The Cards?
Chart 1: Bond Yields
Chart 2: YTMs on Riskier Bond Segments
Weekly Review – Emerging Market Debt Rallies
Over the week ended 7 June 2012, Emerging Market bond yields moved lower, aided by a rise in US Treasury yields from the previous week’s record low. Hard Currency Emerging Market debt yields fell -24.25 basis points (bps) to yield 5.056%, while Local Currency Emerging Market debt yields fell -11.60 bps to yield 6.337%. Safer segments of the fixed income spectrum saw their yields rise slightly, with US investment grade corporate debt seeing a 3.04 bps rise in their yields, and the yields on G7 bonds rising by 1.29 bps.
Not surprisingly, some of the best-performing fixed income funds over the week had fairly large exposure to Emerging Market debt. The ING (L) RF EM Debt HC X EUR Hedge, which has the majority of its holdings in Hard Currency Emerging Market debt, posted a 2.2% week-on-week return as its EUR hedge boosted its returns. LM WA EmMKT Bond A SGD H (qdis) returned 2.0% with the majority of its emerging market exposure in the hard currency space.
The SGD had a mixed week, gaining against the EUR (0.5%) but losing ground against other major currencies like the AUD (-0.6%) and USD (-0.9%). Highlighting its “safe-haven” status, the Japanese yen gained 2.5% against the SGD over the week, hurting the stocks of Japanese exporters but benefiting fixed income funds with exposure to the Japanese yen.
Bond Market Outlook
In monetary policy news, the week ended 7 June 2012 witnessed several important monetary policy decisions, with the People’s Bank of China (PBoC) cutting rates, while despite the Fed standing still and Mario Draghi’s European Central Bank (ECB) turning the screws on European leaders, Ben Bernanke and Mario Draghi look set to further ease monetary policy in the near future.
In China, The People’s Bank of China (PBoC) announced a cut in its benchmark interest rate by 25 bps, effective on 8 June 2012. This is the first rate cut since September 2008 and the first price-oriented monetary policy since July 2011. The cut brings the official 1-year lending rate to 6.31% and the 1-year deposit rate to 3.25%. It was widely agreed upon that an interest rate cut was necessary given the range of disappointing economic data that had been published for April. The rate cut also comes at an interesting time, just before the release of other important economic data such as industrial production, trade figures and new loans, which suggests that these figures may also point towards a deteriorating economic situation for China. The rate cut will definitely provide support for the economy as it will help spur demand for credit, unlike previous Reserve Requirement Ratio (RRR) cuts. However, a one-time rate cut itself is unlikely to ease all economic stress, hence we expect further monetary policy easing to come.
One notable feature of the policy move this time was that the interest rate cut was asymmetrical. PBoC also liberalised banks’ ability to set lending and deposit rates, allowing banks to set lending rates as low as 20% below the benchmark rate (increased from 10% previously) and deposit rates as high as 10% above the benchmark rate. The liberalisation marks a step towards reforming the nation’s financial system.
In Europe, the ECB held its benchmark rates constant at 1.0%, putting pressure on European leaders to come up with a solution as indicated by Draghi’s press conference remarks of "Some of the problems in the Euro area have nothing to do with monetary policy. It's not appropriate for ECB policy to take the place of other players' lack of actions". With the ECB not receiving any help thus far from European leaders, the ECB President has explicitly made it clear that despite having an arsenal with which to deal with the current crisis, the ECB will not be taken as the easy way out for politicians to deal with the sovereign debt crisis.
In the US, Fed Chairman Ben Bernanke gave testimony to Congress on 7 June 2012, citing worries over contagion from Europe as the biggest concern amidst a cautious economic outlook. In his testimony, Bernanke, like Draghi the day before, laid the task plainly in front of his audience. Citing “monetary policy is not a panacea” and “I'd be much more comfortable if, in fact, Congress would take some of this burden from us”, it is clear that the fiscal situation in the US could be improved to aid the Fed in propping up the economy. Given the upcoming Presidential elections in November between Obama and Romney, any agreement over the US’s fiscal situation is unlikely to be resolved prior to the elections.
In bond issuance news, Spain managed to fulfil its debt issuance target on 7 June 2012, raising EUR 2.1 billion in the process with its 10 year debt issues auctioned at a yield of 6.12%, up from its previous debt auction of 5.77%. Yields of its 4-year and 2-year bonds were auctioned at 5.44% and 4.48%, up from 4.36% and 3.52% respectively. Yields on Spanish 10 year debt in the secondary market fell following the auction to close at 6.088% on 7 June 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. 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]