Weekly Review – More Easing On The Cards?
Chart 1: Bond Yields
Chart 2: YTMs on Riskier Bond Segments
Weekly Review – Riskier Bonds Outperform
Over the week ended 14 June 2012, bond yields on riskier segments of the bond market moved lower, helping the performance of bond segments like Emerging Market Debt and High Yield. The yield on US High Yield bonds declined -4bps to 7.77%, while Asian High Yield bonds saw a -12.6bps decline to 8.355%. Asian bonds saw yields move -7.7bps lower to 4.852% while emerging market bonds saw declines for both the hard currency and local currency segments. Despite market talk of further quantitative easing measures, G7 bond yields rose 9bps, hurting the performance of the global bond segment.
In line with the movement of yields, riskier bond funds delivered stronger returns over the week, with the Fidelity Asian HY AMDIST SGD Hedged gaining 0.6% while the Eastspring Inv US High Yield Bd USD A delivered a 0.5% return. Emerging market bond funds like the Threadneedle (Lux) EM Debt Cl ASH SGD and United Emerging Markets Bond Fund delivered returns of 0.7% and 1% respectively.
Alongside the volatility in financial markets, currency movements also played a significant role in returns for several fixed income funds. As investor risk appetite returned, the AUD appreciated by 1.4% against the SGD, helping the Nikko AM Shenton ShortTerm Bond(A$) to deliver a 1% week-on-week return.
Bond Market Outlook
Spanish yields rose to new euro-era highs, with the 10-year Spanish government bond yield touching 7% on 14 June as Moody’s downgraded the nation’s debt to “Baa3” from “A3”, just one notch above “junk” in addition to being on review for a further downgrade. Italian yields were also under pressure as the country sold EUR 4.5 billion worth of debt amidst rising peripheral Eurozone bond yields; nevertheless, the auction was largely successful, with almost EUR 7.5 billion of demand for EUR 4.5 billion of debt. With Spanish and Italian yields remaining at elevated levels, the availability of financing remains an issue for troubled Eurozone sovereign nations, which could accelerate a push towards alternate means of financing, in the form of the ECB restarting sovereign bond purchases, or even heavily levering up the ESM by means of ECB borrowings (should the ESM be granted a banking licence).
In India, inflationary pressures appear to be the primary concern for the Reserve Bank of India, which unexpectedly held the repo rate unchanged at 8% on 18 June, in contrast to the latest monetary policy actions of other central banks (see Bonds Weekly: At Ease Gentlemen! [7 June 2012]). While inflation has begun to moderate in most Asian economies, the India WPI has remained above 7% year-on-year since February 2012, with May’s reading accelerating to 7.55% year-on-year, placing pressure on the country’s central bank which is also battling slowing economic growth.
Even as a positive election result in Greece has minimised concerns over the country’s potential quick exit from the Eurozone, we believe there is a long way to go in solving the region’s issues. In the near-term, investor risk appetite is likely to be given a boost, which should benefit riskier segments of the bond market like high yield and emerging market debt, but investors should be cautioned that bouts of volatility are likely to continue as various “fixes” for the currency-bloc are debated and implemented. 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. We maintain a preference for 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]