Fixed Income –Opportunities
and Risks
For internal use only, not for external circulation
By: iFAST Research Team
Integrated Wealth Management Platform
www.ifastfinancial.com
and Risks
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In this presentation
• Key drivers of fixed income returns
• Year-to-date performance
• Some comments on currency and the SGD
For internal use only, not for external circulation
•
• Key issues and implications for the asset class
• Opportunities and risks
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What drives fixed income
returns?
For internal use only, not for external circulation
returns?
3
What drives fixed income performance?
• Credit/Country selection
• Duration
• Currency
• Macroeconomic factors
For internal use only, not for external circulation
• Macroeconomic factors
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What drives fixed income performance?
• Credit/Country selection
– Positive developments in a company or country
can lead to lower perceived default risk
– This leads to a lower yield demanded on the
For internal use only, not for external circulation
– This leads to a lower yield demanded on the
issuer’s debt, which is positive for bond
performance
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What drives fixed income performance?
• Duration
– Measure of the sensitivity of bonds to interest
rate movements
– Generally, longer maturity debt has higher interest
For internal use only, not for external circulation
– Generally, longer maturity debt has higher interest
rate risk, and correspondingly, longer duration
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What drives fixed income performance?
For internal use only, not for external circulation
10-year bond 5-year bond 2-year bond
PV $1,000 PV $1,000 PV $1,000
Periods 10 Periods 5 Periods 2
FV -1000 FV -1000 FV -1000
PMT -50 PMT -50 PMT -50
INT 5% INT 5% INT 5%1%
increase
in
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10-year bond 5-year bond 2-year bond
PV $926 PV $958 PV $982
Periods 10 Periods 5 Periods 2
FV -1000 FV -1000 FV -1000
PMT -50 PMT -50 PMT -50
INT 6% INT 6% INT 6%
-7.4% -4.2% -1.8%
in interest
rates
What drives fixed income performance?
• Currency
– Generally a more important factor for local
currency debt
– In more recent times, currency has played a part
For internal use only, not for external circulation
– In more recent times, currency has played a part
in returns on hard currency (EUR, USD) debt, from
an SGD-perspective
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What drives fixed income performance?
• Macroeconomic factors
– Inflation/deflation
– Economic policy
– Fiscal policy
For internal use only, not for external circulation
– Fiscal policy
– Recession/expansion
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Year-to-date performance
For internal use only, not for external circulation
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Year-to-date performance
For internal use only, not for external circulation
High Yield
Global Bonds
Year-to-date returns (as of 30 Apr 2011)
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-3% -2% -1% 0% 1% 2% 3%
Singapore Bonds
Emerging Market Bonds (HC)
Asian Bonds
Source: Bloomberg; Returns in SGD terms
Year-to-date performance
For internal use only, not for external circulation
Fund YTD Return (as of 30 Apr 11) Classification
Fidelity Eur HY EUR 10.6% High Yield
Parvest Conv Bond Europe EUR 8.3% Convertibles
ING RF EmMkt Debt HC EUR Hedged X 8.1% EM Debt
Fidelity Eur Bd EUR 6.1% Euro Bonds
AI Glb High Yield Bd Fd Axh SGD-H 5.1% High Yield
FTIF-Templeton Glb Bond A(mdis) SGD-H1 4.4% Global Bonds
AllianzGl US High Yield SGD Hedged 4.3% High Yield
BNPPL1 Bd Best Selection Wld Em E-H EUR 3.8% EM Debt
12Source: Bloomberg; Returns in SGD terms with dividends reinvested
LionGlobal Emg Mkt Bond SGD Hedged 3.8% EM Debt
LionGlobal AUD Short Duration Fund 3.6% Short Duration
United International Bond Fd 3.6% Global Bonds
Legg Mason WAM GMS A-DIS-Q SGD H 3.5% Global Bonds
PRU Mthly Income Plan Cl A 3.3% High Yield
Fidelity Asian HY AMDIST SGD-Hged 3.1% High Yield
Fullerton Asian Bond Fd Cl B SGD 2.8% Asian Bonds
JPM EmMkt LocalCcy Debt USD A Mth 2.7% EM Debt
United GEMS Investments S$ 2.6% EM Debt
PIMCO Emerg Mkt Bd Cl E SGD Hed 2.5% EM Debt
PineBridge Singapore Bond Fund 2.4% Singapore Bonds
United Asian Bond Fund SGD 2.4% Asian Bonds
Year-to-date performance
For internal use only, not for external circulation
Fund YTD Return (as of 30 Apr 11) Classification
LM WA EmMkt Bond A USD (mdis) -2.5% EM Debt
PIMCO Total Return Bond Cl E USD -2.5% US Bonds
Fidelity USD Bd USD -2.7% US Bonds
13Source: Bloomberg; Returns in SGD terms with dividends reinvested
PIMCO Emerg Mkt Bond Cl E USD -2.7% EM Debt
Schroder ISF Glb Co Bnd A Acc USD -2.7% Global Bonds
Fidelity EmerMktDebt A-SGD -2.8% EM Debt
Parvest Conv Bond Asia USD -2.8% Convertibles
PIMCO Glb Bond Cl E USD -3.2% Global Bonds
Schroder Asian Bond Fund -5.8% Asian Bonds
BNPPL1 Bd Best Selection Wld Em USD -6.8% EM Debt
Currency
For internal use only, not for external circulation
Currency
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Currency
For internal use only, not for external circulation
• Currency has been a significant driver of fixed
income returns in 2011
• As of 3 May 2011, the USD has depreciated by
4.3% against the SGD on a YTD basis
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4.3% against the SGD on a YTD basis
• The EUR strengthened 6% against the SGD over
the same period
• Unlike many other central banks which set domestic
interest rates, the MAS utilises the strength of the
SGD against a basket of trading partner currencies to
manage monetary policy
Currency
For internal use only, not for external circulation
• A stronger SGD makes imports cheaper, which
mitigates imported inflation; However, this makes
Singapore exports more expensive
• Conversely, a weaker SGD boosts exports, but
increases inflationary risk
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• In April 2011, the MAS continued to guide for a
“gradual, modest appreciation” of the SGD, but re-
centred the currency trading band upwards
• Since April 2010, the SGD has been on a path of
Currency
For internal use only, not for external circulation
appreciation; Prior to that, the MAS had guided for
zero percent appreciation since October 2008
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Currency
For internal use only, not for external circulation
100
105
110
SGD NEER (14 Apr 2009 = 100)
18
85
90
95
100
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Source: Goldman Sachs, Bloomberg
Currency
For internal use only, not for external circulation
• Some experts are calling for a “bottom” on the US
dollar (estimated to make up a quarter of the SGD-
NEER basket)
• Still makes sense to seek SGD-hedged or SGD-
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• Still makes sense to seek SGD-hedged or SGD-
focused fixed income investments for 3 reasons:
1. Hedging is cheap at the moment
2. Fixed income yields are relatively low
3. The interest rate environment remains volatile
Key Issues and Implications
For internal use only, not for external circulation
Key Issues and Implications
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Key Issues and Implications
For internal use only, not for external circulation
• S&P lowering its outlook on the US sovereign
credit rating to “negative”
– The AAA (highest possible) rating of US sovereign
debt appears in question following S&P’s recent
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debt appears in question following S&P’s recent
move
– This is not a “downgrade”
– From 1996-1997, similar events occurred when
the Federal Government shut down temporarily
Key Issues and Implications
For internal use only, not for external circulation
• S&P lowering its outlook on the US sovereign credit rating to “negative”
– A downgrade could mean higher yields and weaker US dollar going forward
Consequences do not differ from our current view
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– Consequences do not differ from our current view on fixed income (higher yields, avoiding US Government debt)
– No clear alternative to the US dollar/US government debt yet
– RMB possibly a future candidate
Key Issues and Implications
For internal use only, not for external circulation
2.4
2.6
2.8
(%)2011 CPI Consensus Estimate (US)
23
1.4
1.6
1.8
2
2.2
Feb
-09
Ap
r-0
9
Jun
-09
Au
g-0
9
Oct
-09
De
c-0
9
Feb
-10
Ap
r-1
0
Jun
-10
Au
g-1
0
Oct
-10
De
c-1
0
Feb
-11
Ap
r-1
1
Source: Bloomberg
Key Issues and Implications
For internal use only, not for external circulation
1
1.5
2
2.5
3
3.5
(%) Breakeven Rates
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-1.5
-1
-0.5
0
0.5
1
Jan
-02
May
-02
Sep
-02
Jan
-03
May
-03
Sep
-03
Jan
-04
May
-04
Sep
-04
Jan
-05
May
-05
Sep
-05
Jan
-06
May
-06
Sep
-06
Jan
-07
May
-07
Sep
-07
Jan
-08
May
-08
Sep
-08
Jan
-09
May
-09
Sep
-09
Jan
-10
May
-10
Sep
-10
Jan
-11
5-year Breakeven 10-year Breakeven
Source: Bloomberg
• Inflation is widely expected to return
– Upward pressure on short term rates as central
banks hike rates
– Investors demand positive real returns - Long term
Key Issues and Implications
For internal use only, not for external circulation
– Investors demand positive real returns - Long term
rates expected to move higher to mitigate
inflationary impact
– Short duration bonds less interest rate sensitive,
avoid longer duration instruments
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Key Issues and Implications
For internal use only, not for external circulation
• European debt woes
– Portugal has joined Greece and Ireland in seeking
bailout aid from the EU, ECB and IMF
– Restructuring for Greek debt likely, but will not
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– Restructuring for Greek debt likely, but will not
shock the market, with 5-year CDS pricing in a
67.5% default probability
– No systemic risk seen arising from latest
happenings
Opportunities and Risks
For internal use only, not for external circulation
Credit/Country selection
• Avoid developed sovereign debt (weaker fiscal
positions, relatively lower yields)
• Prefer emerging market and corporate credit
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• Prefer emerging market and corporate credit
(EM governments and corporations have
healthier balance sheets, default)
• Avoid developed
sovereign debt
• Prefer emerging market
• Weaker fiscal positions,
relatively lower yields
• EM governments and
corporations have
Opportunities and Risks
For internal use only, not for external circulation
Credit/Country selection
• Prefer emerging market
and corporate credit
• High yield remains
relatively attractive
corporations have
healthier balance sheets
• Yields relatively attractive,
but HY spreads already
lower than historical
average
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Opportunities and Risks
For internal use only, not for external circulation
8101214161820
(%)High Yield
29
02468
10
Jan
-86
Ap
r-8
7
Jul-
88
Oct
-89
Jan
-91
Ap
r-9
2
Jul-
93
Oct
-94
Jan
-96
Ap
r-9
7
Jul-
98
Oct
-99
Jan
-01
Ap
r-0
2
Jul-
03
Oct
-04
Jan
-06
Ap
r-0
7
Jul-
08
Oct
-09
Jan
-11
YTM High Yield Spread
Source: Bloomberg, Credit Suisse
– US short term interest rates should remain relatively low (Federal Reserve may wait for employment to pick up
• Seek shorter duration
fixed income products
• Fund managers can sell
Opportunities and Risks
For internal use only, not for external circulation
Duration
employment to pick up significantly before tightening)
– Fiscal issues and inflationary risk indicates longer-dated yields should be expected to rise
• Fund managers can sell
bond futures to reduce
portfolio duration
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– EM currencies seen
as beneficiaries of
capital flows to the
• Favour local currency
exposure
• SGD-hedged fixed
Opportunities and Risks
For internal use only, not for external circulation
Currency
region
– Hedging currency
risk (USD to SGD) is
not expensive at the
moment
• SGD-hedged fixed
income funds are also
favoured
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– Inflation returning
– Global economic
growth remains on
• Yields expected to be
on the rise
• Prefer equities over
Opportunities and Risks
For internal use only, not for external circulation
Macroeconomic factors
growth remains on
track
• Prefer equities over
fixed income
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Portfolio Allocation
For internal use only, not for external circulation
Fixed Income Neutral Allocation Current Target
Cash / Money Market 0.0% 0.0%
Singapore / SGD Bias 30.0% 30.0%
Global Bonds 25.0% 15.0%
Asian Bonds 25.0% 25.0%
- No widespread value across bond classes
- Possible interest rate hikes in 2011 should be negative for bond returns
- Reducing duration (and interest rate risk) for SGD bias bonds by exposure via a short duration fund
- We continue to dislike global bonds as yields remain unattractive and susceptible to interest rate hikes
- EM Debt and High Yield bonds offer higher potential returns and less sensitive to interest rate changes
- Suggest SGD-hedged classes of bonds or funds managed from a SG perspective
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Asian Bonds 25.0% 25.0%
Emerging Market Debt 10.0% 15.0%
High Yield 10.0% 15.0%
100.0% 100.0%
Fixed Income Portfolio Allocation
For internal use only, not for external circulation
PRU Mthly
Income Plan Cl
A
15.0%
UOB United Glb Fullerton Short
Term Int Rt C S$
DWS Lion Bond
Cl A
7.5%
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UOB United Glb
Emerging Mkts
Portfolios S$
15.0%
Schroder ISF
Glb Co Bnd SGD
Hedged A Dis
7.5%
Legg Mason
Asian Bond
Trust
25.0%
Term Int Rt C S$
30.0%
Source: iFAST
Disclaimer
iFAST and/or its licensed financial adviser representatives may own orhave positions in the funds of any of the asset management firms or fundhouses mentioned or referred to in the article, or any unit trusts orSingapore Government Securities bonds related thereto, and may fromtime to time add or dispose of, or may be materially interested in any suchunit trusts or Singapore Government Securities bonds. This article is notto be construed as an offer or solicitation for the subscription, purchase orsale of any fund. No investment decision should be taken without first
For internal use only, not for external circulation
sale of any fund. No investment decision should be taken without firstviewing a fund's prospectus. Any advice herein is made on a general basisand does not take into account the specific investment objectives of thespecific person or group of persons. Past performance and any forecast isnot necessarily indicative of the future or likely performance of the fund.The value of units and the income from them may fall as well as rise.Opinions expressed herein are subject to change without notice. Pleaseread our disclaimer in the website. If you have any queries about theabove contents, please contact iFAST.
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