Fixed Income  
Bonds Weekly: ECB Holds While Emerging Market Central Banks Slash Rates [27 October 2017] October 31, 2017
Bonds Weekly: ECB Holds While Emerging Market Central Banks Slash Rates [27 October 2017]
Author : iFAST Research Team

Bonds Weekly: ECB Holds While Emerging Market Central Banks Slash Rates [27 October 2017]


Performance was rather weak over in global bond markets for the week ended 26 October 2017, with the yields of global bonds rising by 6 basis points to 1.96% when the week ended. G7 sovereign bonds saw yields rise by 4 basis points to 0.61%, while Malaysia government bonds saw a greater 6 basis points rise in yields to 1.96% when the week ended. The yields of Asian investment grade bonds rose 5 basis points over the week to 3.57% while over in the US credit space, US investment grade corporate bonds saw yields rise 8 basis points to end the week offering investors a yield of 3.63%.

Over in the riskier bond segments, a similar rise in yields was witnessed. The yields of US high yield bonds rose 5 basis points to 5.82% when the week ended, while emerging market hard-currency denominated bonds were the worst performing over the week, as yields in the segment rose 16 basis points to end the week at 5.37%.

On average, the bond funds were down by -0.16% over the week. AmConservative emerged as the top performer as the fund gained 0.34% over the same period. On the other hand, Affin Hwang Select AUD Income Fund - MYR retreated -2.09% and emerged as the worst performer due to the appreciation of Ringgit against AUD by about 2.16%.

(Basis points figures might differ due to rounding-off)



The European Central Bank (ECB) held benchmark policy rates unchanged, while announcing that from January 2018 onwards, its current monthly asset purchases will continue at a pace of EUR 30 billion (as compared to the current EUR 60 billion) until the end of September 2018, “or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim”. While lowering the guided asset purchase amount, the ECB added that asset purchases could be increased again in the future should economic conditions warrant so. The ECB also reiterated that overall growth momentum is robust, with “private consumption underpinned by rising employment” and that “the upswing in business investment continues to benefit from very favourable financing conditions and improvements in corporate profitability”. Market participants interpreted the ECB’s announcement rather dovishly, with the EURUSD exchange rate falling -1.3% as the press conference ended. While policy-makers are starting to take the first step in gradually scaling back on stimulus, we opine that the overall approach is still data-dependent going forward.

Over in South America, Brazil’s monetary policy committee, the Copom, made a unanimous decision to cut the Selic rate by -75 basis points to 7.50% last week. The rate cut this time round is the first in the latest five meetings that a -75 basis point cut was announced, rather than a -100 basis point cut, and marks the start of a “moderate reduction of the pace of easing” as signalled by the central bank in its previous monetary policy meeting in September. The latest economic indicators have continued to reflect well of the Brazilian economy’s progress in its road to recovery and in 2Q 2017, the economy had posted positive year-on-year GDP growth for the first time in 3 years. In its monetary policy meeting last week, the central bank had provided its own projections for inflation for 2017-2019 to “stand around” 3.3%, 4.3% and 4.2% respectively. With expectations of a continued “gradual recovery of the Brazilian economy” as well as favourable inflation rates over the coming quarters, the central bank highlighted, that, “regarding the next meeting”, it views a “moderate reduction of the pace of easing as appropriate”. This would see further rate cuts at -50 or -25 basis points in the upcoming Copom meetings.

In Russia, the Russian central bank slashed its key rate by -25 basis points to 8.25% for the fifth time this year, as widely expected. While the central bank had stated that “estimates as of 23 October 2017 indicate that annual inflation is 2.7%”, the bank also highlighted that the downward deviation of inflation against its inflation forecast was “driven mainly by temporary factors”. Consequently, the bank is of the view that “inflation expectations remain elevated” as the decline in inflation has yet to become sustainable. While the bank projects inflation to come in close to 3.0% by late 2017, it expects inflation to “approach 4.0%”, the bank’s target inflation rate, going forward; as temporary factors driving the dip in inflation “run their course”. Additionally, the central bank had also guided that, given the “balance of risks for inflation”, its ongoing transition from moderately tight to neutral monetary policy would be “gradual”. Nonetheless, the bank has mentioned that its monetary policy decisions will be based not only on its inflation outlook, but also based on economic performance against its forecast. The bank had left open the option of further rate cuts in the coming meetings.

This week, the policy-makers of several major central banks are scheduled to provide updates to their respective monetary policies. Much attention will be paid to the US Federal Reserve’s FOMC meeting over Wednesday and Thursday, with expectations that no changes will be made to the Fed fund funds target range of 1.00-1.25%. Other monetary policy guidances include that from Japan’s BOJ as well as UK’s BOE on Tuesday and Thursday respectively. While the BOJ is widely expected to leave its policy balance rate and 10-year yield target unchanged, market expectations are for the BOE to raise rates by 25 basis points to 0.50%.

We have been highlighting the risks of further increases in interest rates (and are still cognisant), and suggest investors avoid longer-duration developed sovereign debt which is most susceptible to rising yields, while opting for shorter duration bond funds which are far less interest rate sensitive. Local short duration bonds, such as the AmIncome Plus, are also a better alternative for investors who are seeking shelter from the volatility and uncertainty seen in financial markets in recent times, with yields that are relatively higher than that offered by developed sovereign bonds, providing an anchor of stability to a portfolio. As we have advocated, riskier fixed income segments, such as that of high yield bonds, should be combined with other safer bond segments, to ensure sufficient levels of diversification within one's fixed income allocation.



On domestic front, RAM Ratings has reaffirmed the AA2/Stable ratings of Kesas Sdn Bhd’s (the Company) RM735 million Sukuk Musharakah IMTN (2014/2023). The reaffirmation of the rating is based on our expectation that the Company will maintain its strong debt-servicing aptitude, underpinned by the Shah Alam Expressway’s (the SAE or the Expressway) mature traffic profile. While the SAE benefits from its strategic alignment that straddles densely populated areas, the Expressway has been experiencing a stronger-than-expected wave of commuter migration to public transportation. This follows the commencement of the LRT extensions, compounded by the availability of alternatives, including toll-free routes.

Based on RAM’s sensitivity testing, the Company is expected to achieve a healthy average annual pre-financing cashflow of RM167 million. This translates into a strong minimum finance service coverage ratio (FSCR) (without cash balances) of 1.16 times and FSCR (with cash balances, post-distribution) of 2.25 times throughout the remaining tenure of the Sukuk.

Fixed Income Funds To Consider:

Bonds – Malaysia:KAF Bond Fund

Bonds – Malaysia:Eastspring Investments Bond Fund

Bonds – Malaysia:RHB Bond Fund

Bonds – Malaysia:AmIncome Plus

Bonds – Malaysia (Islamic):AMB Dana Arif Class A-MYR

Bonds – Malaysia (Islamic):Libra ASnitaBOND Fund

Bonds – Asia excluding Japan:RHB Asian Total Return Fund

Bonds – Emerging Markets:RHB Emerging Markets Bond Fund

Bonds – Malaysia Foreign Exposed :AmDynamic Bond

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