By Jessica Wee
If you are keeping your money in cash, most likely you would have kept it in a time / fixed deposit (a type of fixed income instrument) at your local bank in order to earn interest income. For higher net worth individuals, they would invest in individual bonds i.e. corporate/ sovereign bonds for the same reason of earning interest income.
For individual bonds, investors will receive coupons/ interest payments either annually or semi-annually. Most bonds are paid semi-annually which means the investors get paid every 6 months. The coupon is fixed and investors will keep receiving it as long as they hold the bond. In addition, investors who invest in individual bonds have certainty about how much and when they will receive the income payment.
With the prospect of global recession looming, institutional investors/ fund managers/ family office managers are scrambling to reposition their investment portfolio in order to preserve capital and to stay resilient in these trying times.
One of the ways to generate returns in this current environment is to put money into a bond with a high enough yield that will offset the increase in inflation. For example, if inflation is 5% this year, you will need your time/fixed deposit/ and/or corporate/sovereign bonds to provide a yield >5% to ensure that the value of your money does not erode overtime. In the UK, its inflation hit a 40-year high in June (CPI rose 9.4% annually) as food and energy prices continued to climb, escalating the country;s historic cost-of-living crisis!
As the rest of the western world (Latin America, Europe, Middle East and Africa) faces elevated inflation, investors are finding Asian bonds attractive as the highest real yields are here. Real yield means the 10-year benchmark bond less most recent monthly inflation Currently Indonesia and Malaysia have the most attractive real yield as these countries get support as commodity exporters.
Looking at China, investment grade bonds are very attractive as the region has offered similar returns to US investment-grade credit in the last decade but with much less volatility and held on well even during the peak of Covid in 2020.
In South Korea, its bonds are seen as another preferred destination as the central bank has been ahead of its peers in raising interest rates and the equities market also has a high correlation with the more debt-friendly trends in global markets. Furthermore, South Korean bonds are less vulnerable to higher inflation and rate hikes because the central bank has been most proactive in normalizing monetary policy in the region. As Korean rates are likely to react more to external headwinds than Korea’s domestic market, its bonds could provide protection from global recession risks in Asia,
It is unlikely that time/fixed deposit is able to give you yields that will be inflation rate. It is now time to look at investing into individual bonds or a bond fund managed by professionals to increase your interest income as well as preserving the value of your money today!
