For internal use only, not for external circulation

Fixed Income –
Opportunities
and Risks

By: iFAST Research Team

Integrated Wealth Management Platform

www.ifastfinancial.com
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 For internal use only, not for external circulation

In this presentation

• Key drivers of fixed income returns

• Year-to-date performance
• Some comments on currency and the SGD
• Key issues and implications for the asset class
• Opportunities and risks

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 For internal use only, not for external circulation

What drives fixed income

returns?

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 For internal use only, not for external circulation

What drives fixed income performance?

• Credit/Country selection
• Duration
• Currency
• Macroeconomic factors

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 For internal use only, not for external circulation

What drives fixed income performance?

• Credit/Country selection
– Positive developments in a company or country
can lead to lower perceived default risk
– This leads to a lower yield demanded on the
issuer’s debt, which is positive for bond
performance

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What drives fixed income performance?

• Duration
– Measure of the sensitivity of bonds to interest
rate movements
– Generally, longer maturity debt has higher interest
rate risk, and correspondingly, longer duration

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What drives fixed income performance?

10-year bond 5-year bond 2-year bond
PV $1,000 PV $1,000 PV $1,000
Periods 10 Periods 5 Periods 2
FV -1000 FV -1000 FV -1000
PMT -50 PMT -50 PMT -50
1%
INT 5% INT 5% INT 5%
increase
in 10-year bond 5-year bond 2-year bond
interest PV $926 PV $958 PV $982
rates Periods 10 Periods 5 Periods 2
FV -1000 FV -1000 FV -1000
PMT -50 PMT -50 PMT -50
INT 6% INT 6% INT 6%
-7.4% -4.2% -1.8%

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What drives fixed income performance?

• Currency
– Generally a more important factor for local
currency debt
– In more recent times, currency has played a part
in returns on hard currency (EUR, USD) debt, from
an SGD-perspective

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What drives fixed income performance?

• Macroeconomic factors
– Inflation/deflation
– Economic policy
– Fiscal policy
– Recession/expansion

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Year-to-date performance

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Year-to-date performance
Year-to-date returns (as of 30 Apr 2011)

Global Bonds

High Yield

Asian Bonds

Emerging Market Bonds (HC)

Singapore Bonds

-3% -2% -1% 0% 1% 2% 3%

Source: Bloomberg; Returns in SGD terms

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Year-to-date performance
Fund YTD Return (as of 30 Apr 11) Classification
Fidelity Eur HY EUR 10.6% High Yield
Parvest Conv Bond Europe EUR 8.3% Convertibles
ING RF EmMkt Debt HC EUR Hedged X 8.1% EM Debt
Fidelity Eur Bd EUR 6.1% Euro Bonds
AI Glb High Yield Bd Fd Axh SGD-H 5.1% High Yield
FTIF-Templeton Glb Bond A(mdis) SGD-H1 4.4% Global Bonds
AllianzGl US High Yield SGD Hedged 4.3% High Yield
BNPPL1 Bd Best Selection Wld Em E-H EUR 3.8% EM Debt
LionGlobal Emg Mkt Bond SGD Hedged 3.8% EM Debt
LionGlobal AUD Short Duration Fund 3.6% Short Duration
United International Bond Fd 3.6% Global Bonds
Legg Mason WAM GMS A-DIS-Q SGD H 3.5% Global Bonds
PRU Mthly Income Plan Cl A 3.3% High Yield
Fidelity Asian HY AMDIST SGD-Hged 3.1% High Yield
Fullerton Asian Bond Fd Cl B SGD 2.8% Asian Bonds
JPM EmMkt LocalCcy Debt USD A Mth 2.7% EM Debt
United GEMS Investments S$ 2.6% EM Debt
PIMCO Emerg Mkt Bd Cl E SGD Hed 2.5% EM Debt
PineBridge Singapore Bond Fund 2.4% Singapore Bonds
United Asian Bond Fund SGD 2.4% Asian Bonds
Source: Bloomberg; Returns in SGD terms with dividends reinvested
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Year-to-date performance
Fund YTD Return (as of 30 Apr 11) Classification

LM WA EmMkt Bond A USD (mdis) -2.5% EM Debt

PIMCO Total Return Bond Cl E USD -2.5% US Bonds

Fidelity USD Bd USD -2.7% US Bonds

PIMCO Emerg Mkt Bond Cl E USD -2.7% EM Debt

Schroder ISF Glb Co Bnd A Acc USD -2.7% Global Bonds

Fidelity EmerMktDebt A-SGD -2.8% EM Debt

Parvest Conv Bond Asia USD -2.8% Convertibles

PIMCO Glb Bond Cl E USD -3.2% Global Bonds

Schroder Asian Bond Fund -5.8% Asian Bonds

BNPPL1 Bd Best Selection Wld Em USD -6.8% EM Debt

Source: Bloomberg; Returns in SGD terms with dividends reinvested
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Currency

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Currency

• Currency has been a significant driver of fixed

income returns in 2011
• As of 3 May 2011, the USD has depreciated by
4.3% against the SGD on a YTD basis
• The EUR strengthened 6% against the SGD over
the same period

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Currency
• Unlike many other central banks which set domestic
interest rates, the MAS utilises the strength of the
SGD against a basket of trading partner currencies to
manage monetary policy
• A stronger SGD makes imports cheaper, which
mitigates imported inflation; However, this makes
Singapore exports more expensive
• Conversely, a weaker SGD boosts exports, but
increases inflationary risk

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Currency
• In April 2011, the MAS continued to guide for a
“gradual, modest appreciation” of the SGD, but re-
centred the currency trading band upwards
• Since April 2010, the SGD has been on a path of
appreciation; Prior to that, the MAS had guided for
zero percent appreciation since October 2008

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Currency
SGD NEER (14 Apr 2009 = 100)
110

105

100

95

90

85
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Source: Goldman Sachs, Bloomberg

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Currency

• Some experts are calling for a “bottom” on the US

dollar (estimated to make up a quarter of the SGD-
NEER basket)
• Still makes sense to seek SGD-hedged or SGD-
focused fixed income investments for 3 reasons:
1. Hedging is cheap at the moment
2. Fixed income yields are relatively low
3. The interest rate environment remains volatile

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Key Issues and Implications

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Key Issues and Implications

• S&P lowering its outlook on the US sovereign
credit rating to “negative”
– The AAA (highest possible) rating of US sovereign
debt appears in question following S&P’s recent
move
– This is not a “downgrade”
– From 1996-1997, similar events occurred when
the Federal Government shut down temporarily

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Key Issues and Implications

• S&P lowering its outlook on the US sovereign
credit rating to “negative”
– A downgrade could mean higher yields and
weaker US dollar going forward
– Consequences do not differ from our current view
on fixed income (higher yields, avoiding US
Government debt)
– No clear alternative to the US dollar/US
government debt yet
– RMB possibly a future candidate

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Key Issues and Implications

(%)
2011 CPI Consensus Estimate (US)
2.8
2.6
2.4
2.2
2
1.8
1.6
1.4
Feb-09

Apr-09

Oct-09

Feb-10

Apr-10

Oct-10

Feb-11

Apr-11
Jun-09

Aug-09

Dec-09

Jun-10

Aug-10

Dec-10
Source: Bloomberg
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Key Issues and Implications

(%) Breakeven Rates
3.5
3
2.5
2
1.5
1
0.5
0
-0.5
-1
-1.5
Jan-02
May-02
Sep-02
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
5-year Breakeven 10-year Breakeven

Source: Bloomberg
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Key Issues and Implications

• Inflation is widely expected to return
– Upward pressure on short term rates as central
banks hike rates
– Investors demand positive real returns - Long term
rates expected to move higher to mitigate
inflationary impact
– Short duration bonds less interest rate sensitive,
avoid longer duration instruments

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Key Issues and Implications

• European debt woes
– Portugal has joined Greece and Ireland in seeking
bailout aid from the EU, ECB and IMF
– Restructuring for Greek debt likely, but will not
shock the market, with 5-year CDS pricing in a
67.5% default probability
– No systemic risk seen arising from latest
happenings

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Opportunities and Risks

Credit/Country selection
• Avoid developed sovereign debt (weaker fiscal
positions, relatively lower yields)
• Prefer emerging market and corporate credit
(EM governments and corporations have
healthier balance sheets, default)

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Opportunities and Risks

Credit/Country selection
• Avoid developed • Weaker fiscal positions,
sovereign debt relatively lower yields
• Prefer emerging market • EM governments and
and corporate credit corporations have
healthier balance sheets
• High yield remains
• Yields relatively attractive,
relatively attractive but HY spreads already
lower than historical
average

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Opportunities and Risks

(%)
High Yield
20
18
16
14
12
10
8
6
4
2
0
Jan-86
Apr-87
Jul-88

Jan-91
Apr-92
Jul-93

Jan-96
Apr-97
Jul-98

Jan-01
Apr-02
Jul-03

Jan-06
Apr-07
Jul-08

Jan-11
Oct-89

Oct-94

Oct-99

Oct-04

Oct-09
YTM High Yield Spread

Source: Bloomberg, Credit Suisse

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Opportunities and Risks

Duration
– US short term interest
rates should remain • Seek shorter duration
relatively low (Federal fixed income products
Reserve may wait for
employment to pick up • Fund managers can sell
significantly before bond futures to reduce
tightening) portfolio duration
– Fiscal issues and
inflationary risk
indicates longer-dated
yields should be
expected to rise

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Opportunities and Risks

Currency
– EM currencies seen • Favour local currency
as beneficiaries of exposure
capital flows to the • SGD-hedged fixed
region income funds are also
– Hedging currency favoured
risk (USD to SGD) is
not expensive at the
moment

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Opportunities and Risks

Macroeconomic factors
– Inflation returning • Yields expected to be
– Global economic on the rise
growth remains on • Prefer equities over
track fixed income

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Portfolio Allocation
Fixed Income Neutral Allocation Current Target
Cash / Money Market 0.0% 0.0%
Singapore / SGD Bias 30.0% 30.0%
Global Bonds 25.0% 15.0%
Asian Bonds 25.0% 25.0%
Emerging Market Debt 10.0% 15.0%
High Yield 10.0% 15.0%
100.0% 100.0%
- No widespread value across bond classes
- Possible interest rate hikes in 2011 should be negative for bond returns
- Reducing duration (and interest rate risk) for SGD bias bonds by exposure via a short duration fund
- We continue to dislike global bonds as yields remain unattractive and susceptible to interest rate hikes
- EM Debt and High Yield bonds offer higher potential returns and less sensitive to interest rate changes
- Suggest SGD-hedged classes of bonds or funds managed from a SG perspective

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Fixed Income Portfolio Allocation

DWS Lion Bond
Cl A
PRU Mthly
7.5%
Income Plan Cl
A
15.0%
Fullerton Short
Term Int Rt C S$ UOB United Glb
30.0% Emerging Mkts
Portfolios S$
15.0%

Schroder ISF
Legg Mason Glb Co Bnd SGD
Asian Bond Hedged A Dis
Trust 7.5%
25.0%

Source: iFAST
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Disclaimer
iFAST and/or its licensed financial adviser representatives may own or
have positions in the funds of any of the asset management firms or fund
houses mentioned or referred to in the article, or any unit trusts or
Singapore Government Securities bonds related thereto, and may from
time to time add or dispose of, or may be materially interested in any such
unit trusts or Singapore Government Securities bonds. This article is not
to be construed as an offer or solicitation for the subscription, purchase or
sale of any fund. No investment decision should be taken without first
viewing a fund's prospectus. Any advice herein is made on a general basis
and does not take into account the specific investment objectives of the
specific person or group of persons. Past performance and any forecast is
not necessarily indicative of the future or likely performance of the fund.
The value of units and the income from them may fall as well as rise.
Opinions expressed herein are subject to change without notice. Please
read our disclaimer in the website. If you have any queries about the
above contents, please contact iFAST.

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