Local currency bond yields have gone up in the first quarter, in line with rising US Treasury yields driven by better US growth prospects and — to a lesser extent — higher inflation expectations.
Omar Slim, CFA, the senior portfolio manager at PineBridge Investments who manages the firm’s Singapore dollar (SGD) bond strategies, says this development does not alter the core role of SGD bonds in investors’ portfolios as the market continues to offer stable returns and opportunities for enhanced yield in spite of a potential for rising interest rates.
“We believe high quality SGD corporate bonds offer some value to Singaporean investors. While the Ministry of Trade and Industry left its GDP growth forecast for this year unchanged at 4% to 6% (as of Feb 15, 2021), we believe that GDP expansion should come in at the higher end of that forecast.
The smooth roll-out of vaccines and relaxation of Covid-19 restrictions should further underpin growth for the year,” he says.
Public spending has increased in response to the pandemic but fiscal policy remains disciplined and Singapore has plenty of fiscal ammunition.
Reflective of this strength, SGD government bonds have fared better than US Treasuries over the past year and over a five-year period.
With healthy growth numbers seen in the coming months, credit spreads continued to tighten as corporate earnings held up better than expected.
Investment grade credit spreads continued on its tightening path as overall corporate earnings affirmed that the economy is well in its recovery phase.
Shorter-duration corporate bonds to shine
While the US Federal Reserve chair has dismissed a rate hike happening this year as “highly unlikely”, the risk associated with such a move remains a key focus. With this in mind, Slim takes a high¬ly selective approach in portfolio construction.
“Despite the accommodative monetary policies in place, we are cautious on duration risk as economic recovery and inflation expectation strengthen. In this environment, we favour shorter duration bonds, which have less interest rate sensitivity, and can help cushion the impact of a rate hike,” he says.
“We also continue to favour high quality investment grade corporate bonds, which we believe offer enhanced yields as the recovery accelerates”.
Duration measures how much a bond’s price is likely to change should interest rates shift as bond prices move inversely to interest rates. For example, a bond with an average duration of 10 years may lose approximately 10% of its value if interest rates rise 1%. In general, bonds with longer maturity dates* tend to be more sensitive to interest rate changes.
“Interest rate hikes are not always bad for investors. Rates have been very low for an extended period; a rate tightening today signals improving economic conditions, which is usually positive for risk assets such as corporate bonds,” he notes.
SGD bonds: A valuable core allocation
Slim says an actively managed SGD bond portfolio with the flexibility to find “sweet spots” across issuers, ratings, maturities, and sectors of the market, and adjust positions as conditions change would be well-positioned to mitigate interest rate risk without sacrificing quality and potential returns.
“This strategy allows investors to hold a highly select portfolio of bonds that offers the benefits of stable income and capital preservation while staying nimble against potential volatility,” he adds. “As such, SGD bonds should continue to be a valuable core allocation for local investors”.
Credit quality also remains key in the corporate segment as defaults do happen in the SGD bond market, but he says default risk can be avoided with thorough due diligence.
“We put significant resources to our credit research process, and we carefully analyse and continuously monitor our credit exposures,” he adds. Adding to the strength of the process is the integration of environmental, social, and governance (ESG) analysis in the credit selection process.
“We integrate ESG in our investment process and every issuer we have is analysed along ESG factors,” he says.
* Maturity refers to the date when the bond becomes due.
For more on PineBridge Investments’ Singapore dollar bond offering, please visit pinebridge.com.sg
All investments involve risk, including the loss of principal amount invested. Past performance is not indicative of future results. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk. Any views represent the opinion of the manager and are subject to change. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any re-publication or sharing of this material. We are not soliciting or recommending any action based on this material. In Singapore, this document is issued by PineBridge Investments Singapore Limited (Company Reg. No. 199602054E), licensed and regulated by the Monetary Authority of Singapore (MAS). This advertisement or publication has not been reviewed by the MAS. Investors should note that the website pinebridge.com.sg and any other website (including any contents therein) referred to in this document have not been reviewed or endorsed by the MAS.