Back to listingBonds
April 2024
Holding out for a rate cut
Economic data remains mixed; but there is clearer guidance that the US Federal Reserve (Fed) will start easing soon. March’s Federal Open Market Committee (FOMC) meeting reiterates the plan for three rate cuts in 2024.
Lower recession risks, lower core rates and easing financial conditions should benefit Emerging Markets (EM) as an asset class. We upgrade our position on EM High Yield (HY) bonds to Overweight from Neutral but downgrade our position on EM Investment Grade (IG) bonds from Neutral to Underweight on valuative grounds.
Cheaper valuations, higher carry and the prospect of a soft-landing should provide spread compression opportunities in the higher-yielding segment.
Given that disinflation in the US is well underway and the prospects for the fed funds rate to be lowered this year are high, we remain positive on duration which should benefit from the easing cycle. Developed Markets (DM) IG bonds and US Treasuries (UST) should be best placed to benefit from falling UST yields in 2024, and we reiterate our Overweight positions on the asset classes.
Developed Markets
The current macro backdrop is supportive for DM IG – low rates volatility and receding recession concerns has resulted in consistent spread tightening in DM IG year to date (YTD). We hold an Overweight position on DM IG based on the elevated yields overall and strong signals by central banks to cut rates. DM IG stands to benefit from lower UST rates given its long duration characteristics. Sector wise, financials has outperformed corporates YTD but it is still offering a pickup over corporates. We continue to like banks, particularly in the EU/UK as growth improves.
For Japan, the end of negative interest rates benefits the banks. Loan rates are expected to be adjusted higher and faster than the deposit rates. Impact on the banks’ securities portfolio is expected to be limited as the banks have proactively reduced duration and Japanese government bond (JGB) holdings in the last two years. On the other hand, a stronger Japanese Yen will have a negative impact on the megabanks because of their overseas exposures. We think the higher net interest margin domestically will dominate and drive earnings higher for the megabanks. Overall, we like the Japanese bank bonds.
Emerging markets
We are turning more constructive on EM as an asset class given the declining recession risk, lower core inflation rates and easing financing conditions. Although EM HY is the top performer YTD, we think valuations of EM HY are not too demanding versus DM HY. We thus upgrade our EM HY position to Overweight from Neutral. Meanwhile, we downgrade our EM IG positioning from Neutral to Underweight as we expect it to underperform on a relative basis given the lack of spread over DM IG.
Asia
In Asia, we prefer Indonesia and India. Within the Indian HY space, we continue to like renewable energy names as the sector stands to benefit from an increasing share of renewables in the country’s energy mix over time. The renewable energy names that we like have sustainable capital structures and adequate liquidity positions. Additionally, within Indian IG, we continue to like quasi-sovereign names and good quality credits with strong balance sheets.
Indian companies benefit from macroeconomic growth, favourable demographics, and structural improvements in the country in part thanks to supportive government initiatives. We view a majority of the companies under our coverage as fundamentally stable. New supply this year within the Indian credit space suggests that there is good investor demand for Indian bonds from stable companies that offer the benefit of diversification and at least the opportunity for attractive carry.
The information provided herein is intended for general circulation and/or discussion purposes only. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The information in this document is not intended to constitute research analysis or recommendation and should not be treated as such.
Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product. In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.
The information provided herein may contain projections or other forward looking statement regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same. Investments are subject to investment risks, including the possible loss of the principal amount invested.
The Bank, its related companies, their respective directors and/or employees (collectively “Related Persons”) may or might have in the future interests in the investment products or the issuers mentioned herein. Such interests include effecting transactions in such investment products, and providing broking, investment banking and other financial services to such issuers. The Bank and its Related Persons may also be related to, and receive fees from, providers of such investment products.
No representation or warranty whatsoever (including without limitation any representation or warranty as to accuracy, usefulness, adequacy, timeliness or completeness) in respect of any information (including without limitation any statement, figures, opinion, view or estimate) provided herein is given by OCBC Bank and it should not be relied upon as such. OCBC Bank does not undertake an obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein.
The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank's written consent. The contents are a summary of the investment ideas and recommendations set out in Bank of Singapore and OCBC Bank reports. Please refer to the respective research report for the interest that the entity might have in the investment products and/or issuers of the securities.
Investments are subject to investment risks, including the possible loss of the principal amount invested. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures, predictions or projections are not necessarily indicative of future or likely performance.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
Cross-Border Marketing Disclaimers
OCBC Bank's cross border marketing disclaimers relevant for your country of residence.
