Bonds weekly: QE goes big in Japan

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Chart shows bond yields

Chart shows yield-to-maturity on riskier bond segments

OVER the week, bond yields were broadly higher despite the rise in risk appetite as evidenced in the rise of equity markets.

Several segments which saw a rise in yields were G7 bonds and US Investment Grade Corporate Bonds where yields rose by 5.94 basis points (bps) and 4.12bps respectively to end the week offering 0.77 per cent  and 3.33 per cent. The only decliner was the US High Yield as its yield dropped by four bps to yield 5.80 per cent. The strong performers over the week were foreign bond funds such as Hwang AUD Income Fund, OSK-UOB Emerging Markets Bond Fund and RHB Asian Total Return Fund.

Each rose 1.16 per cent, 0.93 per cent and 0.87 per cent, adding to the month-to-date return 1.99 per cent, 0.22 per cent and minus 0.32 per cent. Local bond funds’ weekly movement rather muted, gaining paltry 0.03 per cent on average, with the only exception of Pheim Income which returned 0.56 per cent last week.

Bond market outlook

Over the week, the biggest news relating to the bond market was the announcement by the Bank of Japan (BoJ) of its decision to set a two per cent inflation target rate as well as the introduction of further quantitative easing which would see its asset purchase program reach 13 trillion yen (approximately US$145 billion) per month and be open ended in nature, although it is slated to begin in January 2014.

Of the 13 trillion yen, two trillion yen would be used to buy longer dated JGBs, 10 trillion yen for short term debt and one trillion yen for the purchase of private debt. Despite the seemingly good news, it appeared as if markets had priced in slightly more easing earlier as the yen strengthened on the news release and seemingly doubt the BoJ’s ability to hit its new two per cent inflation target.

Malaysia bond market

We continue to see the uptick of yield-to-maturity in shorter-end of the Malaysia Government Securities (MGS) especially in three-year paper. It closed higher at 3.144 per cent on January 25, 2013, rose substantially by 15.3 basis points since the early of the year that hovered at 2.991 per cent.

Meanwhile, five-year and 10-year MGS yields edged up by 1.1 bps and 2bps over the week. Trading amount declined by 63.2 per cent in private debt securities (PDS) segment given the waning trading interest on PDS market and concerns on the upcoming general elections which caused equity market plunged sharply by 2.43 per cent on Monday.

Almost 50 per cent of the trading amount took place at AA-rated PDS segment while AAA-rated PDS papers filled the gap. Within corporate scene, Media Prima MTN that matures at December 28, 2017 was heavily traded with a total of RM115 million was transacted as of last Wednesday.

On local credit ratings movement front, RAM Ratings revised the outlook of AMMB Holdings Bhd, AmBank Bhd, AmIslamic Bank Bhd and AmInvestment Bank Bhd from stable to positive while maintained their respective ratings unchanged.

Besides, the outlook of a total of RM800 million Al-Bai’ Bithaman Ajil Islamic Debt Securities issued by Kesas Sdn Bhd was revised to stable from negative by RAM Ratings. We continue to advocate investors maintain exposure to both the safer segments of fixed income for stability, as well as the riskier segments of fixed income, which have the potential to significantly enhance the yield on one’s portfolio.

For investors seeking stronger returns, we continue to maintain a preference for high yield and emerging market bonds, although yields have fallen over the course of 2012, which entails a lower expected return from these bond segments, so investors should not be extrapolating the returns achieved last year. We maintain a preference for ringgit-focused fixed income funds which are structured or managed to guard against unexpected losses due to currency depreciation against the ringgit.