15 fixed income

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

1

In this presentation

• Key drivers of fixed income returns

• Year-to-date performance

• Some comments on currency and the SGD


•

• Key issues and implications for the asset class

• Opportunities and risks

2

What drives fixed income

returns?


returns?

3

What drives fixed income performance?

• Credit/Country selection

• Duration

• Currency

• Macroeconomic factors



4


• 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


– This leads to a lower yield demanded on the

issuer’s debt, which is positive for bond

performance

5


• Duration

– Measure of the sensitivity of bonds to interest

rate movements

– Generally, longer maturity debt has higher interest


– Generally, longer maturity debt has higher interest

rate risk, and correspondingly, longer duration

6



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

7

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


• Currency

– Generally a more important factor for local

currency debt

– In more recent times, currency has played a part


– In more recent times, currency has played a part

in returns on hard currency (EUR, USD) debt, from

an SGD-perspective

8



– Inflation/deflation

– Economic policy

– Fiscal policy


– Fiscal policy

– Recession/expansion

9

Year-to-date performance


10



High Yield

Global Bonds

Year-to-date returns (as of 30 Apr 2011)

11

-3% -2% -1% 0% 1% 2% 3%

Singapore Bonds

Emerging Market Bonds (HC)

Asian Bonds

Source: Bloomberg; Returns in SGD terms



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



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


Currency

14

Currency


• 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

15

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


• 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

16

• 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


appreciation; Prior to that, the MAS had guided for

zero percent appreciation since October 2008

17

Currency


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


• 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-

19

• 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



20



• 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

21

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



• 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

22

– 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



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



1

1.5

2

2.5

3

3.5

(%) Breakeven Rates

24

-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



– 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

25



• 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

26

– 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


Credit/Country selection

• Avoid developed sovereign debt (weaker fiscal

positions, relatively lower yields)

• Prefer emerging market and corporate credit

27

• 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



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

28



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



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

30

– EM currencies seen

as beneficiaries of

capital flows to the

• Favour local currency

exposure

• SGD-hedged fixed



Currency

region

– Hedging currency

risk (USD to SGD) is

not expensive at the

moment

• SGD-hedged fixed

income funds are also

favoured

31

– Inflation returning

– Global economic

growth remains on

• Yields expected to be

on the rise

• Prefer equities over



Macroeconomic factors

growth remains on

track

• Prefer equities over

fixed income

32

Portfolio Allocation


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

33

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


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%

34

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


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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