Published October 28, 2008

Bond funds gain as equities crash

Investors still too fearful to venture back into riskier assets: analysts

By OH BOON PING

	Email this article
	Print article
	Feedback

THE continued financial turmoil coupled with liquidity pumping have led to strong performance among bond funds in recent weeks.

Rush for safety: Fixed income securities in developed markets benefited from fears of debt defaults in emerging markets. Yields on emerging-market dollar bonds have climbed to 8.62 percentage points more than Treasuries

Pimco Total Return Bond in US dollars took pole position with best one-month return of 6.06 per cent, while UOB Global Bond Fund in Singapore dollars posted a return of 5.51 per cent, according to Fundsupermart.

FTIF-Templeton Global Bond A took fourth spot with a 3.87 per cent return.

The strong performance of these funds came as equities were hit repeatedly by growing alarm that a global recession will ravage corporate profits.

Yesterday, Tokyo's Nikkei 225 index closed down 6.4 per cent to 7,162.90 - the lowest since October 1982, while Hong Kong's Hang Seng Index tumbled 12.7 per cent to 11,015.84 - its lowest close in more than four years.

'Those who have deeper pockets may still want to put some money in fundamentally sound stocks since they will give better returns in the long term.' - Song Seng Wun, CIMB economist

European markets followed Asia lower, with benchmarks in Britain, Germany and France trading down more than 4 per cent or more in early trading.

In Singapore, the Straits Times Index fell 145.39 points to 1,600.28 on Friday - its lowest closing level since September 2003.

Similar bond rallies are seen elsewhere, where yields on ultra short-dated three-month US Treasury bills slipped just below one per cent on Thursday - just above the near zero mid-September lows when 158-year old Lehman Brothers collapsed.

The 30-year Treasury bond yield plunged 27 basis points last week to 4.062 per cent. It reached 3.8676 per cent on Oct 24, the lowest since regular issuance of the security began in 1977, as spreading financial turmoil wiped out more than US$10 trillion of stock market value worldwide this month.

According to market watchers, the contrasting fortunes between fixed income and equities reflects the fact that many investors are still too frightened to venture back into riskier assets. 'Bonds are the instrument, par excellence, to profit from the crisis,' Societe Generale SA said in a report.

In addition, fixed income securities in developed markets benefited from growing fears of debt defaults in emerging markets. Last week, yields on emerging-market dollar-denominated bonds climbed to 8.62 percentage points more than Treasuries as investors dumped the securities, up from 3 percentage points at the start of September, according to the JPMorgan Chase & Co EMBI+ Index, reflecting the higher premium investors demand to hold emerging market debt compared with safe-haven debt.

The MSCI Emerging Markets Index fell to a five-year low as stocks from Brazil to Korea tumbled on speculation developing nations will find it harder to service foreign debt.

Global investors are afraid that the world may see more countries go the way of Iceland, whose economy effectively collapsed this month after its financial sector went bankrupt. In Europe, for example, Hungary, Ukraine and Belarus are all, like Iceland, in talks with the IMF to discuss possible loans.

Although Singapore government bonds have traditionally been immune to equity markets turmoil, the overall UOB SGS Index, which measures the performance of Singapore government bonds, has risen steadily to 170.836 last month - up from 166.949 in June.

CIMB economist Song Seng Wun recommends investors to raise their portfolio allocation to cash and bonds not just because of their strong performance, but that 'there are really not many options left.'

'In equities, the investor may consider bottom-fishing but no one knows where the bottom is. Having said that, I will like to point out that those who have deeper pockets may still want to put some money in fundamentally sound stocks since they will give better returns in the long term.'

Still, some market watchers expressed concerns that the liquidity pumping into struggling banks and short-term funding markets worldwide means that a spike in inflation is in order.

'The next inflation cycle is going to be the real thing,' said Don Coxe, global portfolio strategist with BMO Capital Markets in Chicago, who was quoted in a Reuters report. Rising price levels erode the real returns for fixed income securities over time.

However, Citigroup economist Sim Moh Siong thinks that this will not happen anytime soon, pointing to the sharp fall in commodity prices and economic downturn.

He explained: 'The high level of liquidity reflects a dysfunctional global banking system that is in need of forced-feed liquidity injection. When the banking system is fully back on its feet, the Fed and major central banks will likely remove the liquidity but the banking system could take quite some time to heal.'

Therefore,'the recessionary scenario should continue to benefit fixed income.'