For the week ended 4 January 2018, bond yields saw a broad rise in yields across the safer segments of fixed income, with global bonds seeing yields rise by 2 bps to 1.97%. The largest rise in yields came from the US Investment Grade and Asian bond space, with a respective rise of 3 bps and 3 bps to see the segments end the week with a yield of 3.61% and 3.85%. Malaysia Government bonds bucked the trend of rising yields in the safer segment space, as yields on Malaysia Government bonds fell -2 bps to end the week with a lower yield of 3.92%.
In the riskier segments of fixed income, things were different as positive risk-on sentiment saw yields fall across the board. US and Asian high yield were the biggest winners, as their yields fell a respective -17 bps and -14 bps. At the end of the week, US high yield offered investors a yield of 5.82% (down from 5.99% previously) while their Asian counterparts offered a yield of 5.49% (down from 5.63% the previous week). Emerging market debt was another benefactor of the reach for yield, with yields falling by -4 bps over the week to offer investors a yield of 5.42%.
On average, bond funds were up by 0.19 over the week.
United Income Plus Fund emerged as the top performer as the fund gained 1.57%.
RHB Asian Total Return Fund clocked a -1.52% losses and emerged as the worst performer due to the weaker performance of USD against a basket of Asian currencies over the week.
(Basis points figures might differ due to rounding-off)
|CHART 1: YTMS ON VARIOUS BOND SEGMENTS
GLOBAL BOND MARKET
Last week was a quiet week for monetary policy, with the highlight of the week being the release of the December FOMC meeting minutes. The latest minutes revealed that most Committee members supported “continuing a gradual approach to raising the target range”, and is in line with the “dot plot” that the US Federal Reserve has that points to three rate hikes in 2018.
In the week ahead, inflation and retail sales will be key to watch for the US. In Europe, the regional unemployment rate as well as the minutes from the ECB’s December meeting will be published, with the latter expected to shed some light on the discussions regarding the mix between public and corporate bond buying from January and the tapering of quantitative easing after September. In the emerging markets, inflation numbers will be released for the key markets of China as well as Brazil.
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.
MALAYSIA BOND MARKET
|CHART 2: YIELD CURVE – MGS AND MY CORPORATE BONDS
|CHART 3: WEEKLY YIELD MOVEMENT – MGS AND MY CORPORATE BONDS
For the week ended 7 January 2017, MGS segment saw broad-based decrease in yields, with the 3-year, 5-year, 7-year and 10-year MGS yields down by -0.4 bps, -5.3 bps, -4.1 bps and -4.4 bps respectively. This was attributable to the resilient Ringgit where MYR has appreciated 1.21% against USD over the week. In the secondary bond market, trading volume were up by 300.7% after a long new year break with the Islamic medium- term note segment taking up 86.9% of total trading activities.
On domestic front, MARC has assigned a final rating of AAA to CIMB Islamic Bank’s (CIMB Islamic) RM 10.0 billion Sukuk Wakalah Programme (Sukuk Wakalah). The outlook on the rating is stable. Upon the review of the final documentation of the issuance, MARC is satisfied that the terms and conditions of the Sukuk have not changed in any material way from the draft documentation on which the earlier preliminary rating of AAA was based.
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