Bonds Weekly: Loosening Policy for Growth [2 December 2011]
Bonds Weekly: Loosening Policy for Growth [2 December 2011]
by iFAST Research Team
Coordinated Actions give European Banks Breathing Space, But Spreads Widened The joint effort by 6 major central banks to ease liquidity pressures in Europe saw the USD swap arrangement costs cut by 50 basis points. In a joint statement, the central banks announced that “The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity". The ECB also announced that it was reducing the initial margin required for collateral placed with it for access to this facility from 20% to 12%, in an obvious attempt to further ease the on-going liquidity problems in the European banking sector which has seen its funding markets dysfunction.
Despite the central banks’ measures, Italian, Spanish and French 10-year government bonds underperformed benchmark German bunds, increasing the additional yield that investors demand to hold the securities. The spreads over the week are as follows: • Italian and German bonds increased 17 basis points to 508 basis points. Chart 1: Sovereign spreads widen Elsewhere in Europe, investors may be selling Portuguese securities before the end of this month after the nation’s credit ranking was downgraded to non-investment grade by Fitch Ratings on Nov. 24. 10-year Portuguese yields climbed 45 basis points to 14.05% after touching a record 14.13%. 2-year note yields were 69 basis points higher at 18.77%. They have risen more than 4 percentage points since this time last week. The Return of Accommodative Monetary Policy Across Asia and in Latin America, central banks have been busily easing monetary policy in an attempt to reduce the trouble global economy’s impact on their respective economies, choosing to focus their efforts on growth with inflation taking a backseat. China’s central bank cut the amount of cash that banks must set aside as reserves for the first time since 2008 as Europe’s debt crisis dims the outlook for exports and growth. The 50 basis-point decrease in reserve-requirement ratios (RRR) will be effective from 5th Dec and could be the first of further cuts to the RRR.
In South East Asia, the Bank of Thailand (BoT) cuts its benchmark interest rate by 25 basis points to 3.25% in order to provide an accommodative monetary policy to support the economic restoration. As the flooding and the weaker exports have severely impacted economic growth, BoT expects the economic growth for 2011 to be 1.8%, lowered from the previously forecasted 2.6%. On the other hand, as inflationary pressure is expected to remain controllable, BoT is likely to further ease its monetary policy if the economic growth continues to slowdown. In Indonesia, Consumer Price Index (CPI) for November further eased to 14-month low at 4.15% after peaking at 7.02% in January 2011. The moderated CPI has provided more flexibility for Bank Indonesia to adopt a looser monetary policy in order to boost economic growth. After it slashed the reference rate by 75 basis points to 6.0% recently, Bank Indonesia is likely to pause its monetary easing. Over the Pacific to Brazil, the Brazilian central bank has cut the key Selic rate by 50 basis points to bring the Selic rate to 11.00%. The central bank has been one of the leading institutions to cut rates in an attempt to lessen the impact from Europe’s debt woes. With the Head of the central bank forecasting further “moderate adjustments”, the Selic rate looks set to head lower on the back of economic worries across the globe. Weekly Review of Bond Yields Chart 4: Bond Yields Yields on riskier bonds fell moderately over the week ended 1 December 2011, as investors were presumably buoyed by the central banks’ measures. G7 bond yields fell by a mild -8.3 bps, while US Investment Grade Corporate Bonds saw yields rise 11.9 bps to 4.94%. The yield on the Singapore Government Bond Index rose 5 bps to 1.11%, representing an extremely low return taking into considering the duration of the index was almost 6 years (as of 1 December 2011).
Riskier segments of the bond market saw more marked decreases in bond yields, with the YTM on US high yield falling 10 bps to -8.65%, and Local Currency EM debt fell -16.4 bps to 6.51%, while yields in the Hard Currency space fell -20.2 bps to 5.60%. Chart 5: YTMs on Riskier Bond Segments Recommended Fixed Income Funds: Bonds – Asia: United Asian Bond Fund SGD [Our current list of recommended fixed income funds are either managed from an SGD perspective, or are hedged to the SGD]
• Spanish and German securities widened 9 basis points to 415 basis points.
• France-Germany spread climbed 7 basis points to 126 basis points.
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Bonds - Designated Parking Facility: DBS Enhanced Income SGD
Bonds – Global: DWS Lion Bond Cl A
Bonds – Global: FTIF-Templeton Glb Bond A(mdis) SGD-H1
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