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 26 April 2012, yields declined noticeably in the high yield space, helping high yield bond funds outperform. The yield on Asian high yield bonds declined -19.3bps to 8.526%, while US high yield bonds saw a -11bps decline in yields to 7.21%. Yields also declined in emerging market debt segments, with both the hard currency and local currency bonds seeing a decline in yields.
Correspondingly, the Fidelity Asian HY AMDIST SGD-Hged posted a 1.1% return over the week ended 26 April, while bond funds like the Legg Mason WA Global HY Fd A SGD H (qdis) and United International Bond Fd with exposure to the high yield space also delivered strong week-on-week returns.
Bond Market Outlook
With rates at near-zero levels, investors have been watching out for signs of further easing measures from the US Federal Open Market Committee (FOMC). In the latest meeting in April, the Federal Reserve kept its guidance for loose monetary policy but did not provide any further comments on additional stimulus measures. On the whole, the Fed’s assessment of the US economy is one of improving conditions, but housing and employment issues remain unresolved, which may warrant keeping interest rates low until 2014.
Across the Pacific, Japan expanded its QE (quantitative easing) programme by 5 trillion yen to 70 trillion yen, with the amount set aside for asset purchases raised by 10 trillion yen to 40 trillion yen. The BOJ’s asset purchase programme is sizable, a sign that the central bank is aggressively attempting to stem deflation while also trying to boost growth (the consensus forecasts just 1.68% real growth for Japan in 2012, while a fourth consecutive year of deflation is anticipated). In reaction to a combination of rising asset purchases and slower exports pitted against the “safe-haven” nature of the yen, the Japanese yen has been rather volatile so far in 2012, beginning the year at 76.88 yen to the USD, before depreciating to 83.73 yen per USD in March; the exchange rate currently stands at 80.14 yen per USD. Investors who wish to benefit from a weaker Japanese yen may wish to consider the FTIF-Templeton Glb Total Ret A(mdis) SGD-H1 and FTIF-Templeton Glb Bond A(mdis) SGD-H1 which both held short positions in the yen (as of end March 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]