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        Higher interest rates are still worth investing in bonds

        Industry Trends joined discussion · 01/21/2022 16:15
        1. Market situation
        We interpret the recent market situation of Chinese dollar bonds and our outlook for the market outlook from two aspects: interest rates and credit spreads:
        The US economic recovery is expanding, inflation is severe, the Fed's attitude is hawkish, and interest rate hike expectations are extremely strong
        The first is interest rates. We all know that the whole year of 2021 is a year of economic recovery, and various economic data in the United States also show the momentum of recovery and expansion, which also means that the benchmark interest rate level of 0%, which has been maintained for more than a year, also ushered in a new turning point. In particular, the recent inflation data is very high, and Fed Chairman Powell has also abandoned the "inflation temporary" argument, and his attitude has gradually become hawkish. The dot plot of the Fed’s meeting on interest rates in December also showed that the Fed is expected to raise interest rates 3 times in 2022 and 2023 respectively, with a total of 6 interest rate hikes, pointing to the benchmark interest rate from 0% to 1.5% by the end of 2023. A relatively large increase will have an impact on U.S. bond interest rates of various maturities. And in January this year, the Fed once again released the message that rate hikes and balance sheet reductions may start earlier and faster. In fact, in the past few months, the market has raised interest rate expectations based on a series of economic data. We have seen short-end 2-year, 5-year, and 10-year Treasury bond rates all have 50- An upside of 70Bp magnitude. For example, the 2-year treasury bond rose from 0.25 to 0.95%. This is actually a good thing for the current investment in fixed income, because adding a credit spread, and the credit spread of a 2-year credit bond with relatively low credit risk, it will be easier to have a 2% spread income.
        Of course, we are also concerned about whether short-term interest rates will continue to rise. Our point of view is: although there are uncertainties brought about by repeated epidemics and variant viruses, from the perspective of medical development and social forward, we still believe that a major The improved new economic cycle is unchanged, especially as far as the United States itself is concerned, its economy is very unlikely to turn down, and the Fed's marginal tightening monetary policy will therefore continue to remain, so from the current In terms of interest rate levels, at least this year, the possibility of implementing multiple interest rate hikes as expected is very high, and there is still a possibility of upward interest rates in various terms. Therefore, although the market has already followed suit with price in the expectation of interest rate hike, we still remind investors to pay attention to the risk of interest rate.
        Second, let's look at credit. First of all, looking back at the market over the past year, from a broad perspective, the entire dollar bond market is still very stable from the beginning of the year to the third quarter of 2021. Basically, it continues to enjoy the Fed's monetary easing continued in 2020 and the global economy is picking up. With the huge benefits of abundant liquidity, the credit spread has been continuously narrowed, but after the fourth quarter, there has been a credit storm and double-kill investment-grade and high-yield markets in Chinese real estate. I believe investors also understand that this is because of the real estate market. The industry impact brought about by the tightening of corporate policies has resulted in the rupture of the capital chain of many high-leverage and liquidity-constrained housing companies, which has resulted in a number of credit incidents. Higher, and its magnitude is much higher than during the 2020 epidemic. It can be said that the returns of both investment grade and high-yield indices will be relatively poor throughout 2021, especially the high-yield indices.
        Looking at the first month of this year, in fact, the market's trading sentiment is basically a continuation of the fourth quarter of 2021, that is, interest rates are still rising, the real estate bond policy has not been significantly relaxed, and there are still risk events in real estate companies, on the verge of. Default, the road to debt restructuring. From the index, we have seen a return of -1.7% for the Barclays China Investment Grade Index YTD and a -11.4% return for the Barclays China High Yield Index YTD from the beginning of 2022, with a drawdown similar to that in November last year.
        There is some panic and over-pricing in the current market yields, so there may be a short-term price recovery as in December last year. We saw that in November last year, when the market yield implied a default rate of 25%, the market quickly realized that the overreaction was overreacted, and the valuation was repaired in December. Of course, this mainly concentrated on the obvious rebound of high-quality housing companies, which had defaulted and survived. For real estate companies with huge default risks, the price stays on the floor. In general, after each major market adjustment, investors are backed by the decline, and the risk valuation of financial assets they face is obviously better than before the market price adjustment, more reasonable and more investable.
        From a fundamental point of view, we believe that the market's confidence still lacks more from policies, and a significant improvement in the smoothness of capital returns. Therefore, our basic judgment on the industry is that the industry is in a process of shuffling the cards and the survival of the fittest. Some marginal policies have improved, and the marginal real estate companies have not been able to be rescued in a timely manner. Therefore, we believe that in the short term, there is a high probability that tail companies will continue to default. However, we must also rationally recognize that the spillover of risks is not boundless, there are no rules to be found, and the entire real estate industry cannot ultimately be a situation of no survivors. So in fact, the key to investment, or the key to real bargain hunting, is to choose high-quality real estate companies that are mispriced. If a real estate company can finally "survive" the trough of the cycle, its own fundamentals can be improved, and its solvency for debt can be proved by actual actions, then the market price will eventually reflect its fundamentals. Therefore, at present, we are relatively more optimistic about the valuation of high-quality real estate companies in the top quantiles.
        2. Are interest rates still worth investing in bonds? Which debt base to choose to avoid risks?
        Choose short-duration strategies, defend against interest rate risk, and seize yielding assets
        Since the outlook is that interest rates will rise, does investing in bonds mean that you will lose money? In fact, this is a matter of holding income and net price changes of the bond itself. As a fixed income asset, bonds have their own holding income, especially with the increase of benchmark interest rates. In fact, the reinvestment yield at this time is very high. So for investors, the best investment is to bear only very small net price fluctuations within the fluctuations that they can bear, and get the coupon income of bonds, then in this case, investors still have a high chance of getting returns. and is significantly higher than the deposit income. In particular, the more the price in the market is, the more favorable the investor is. When they start investing at this time, they can obtain the best return on purchases. The further upside risk is relatively small, and the downside may have more room. big. Therefore, this round of interest rate hike cycle is also an opportunity for investors to improve future returns.
        In the face of interest rate risk, the short-duration strategy is our most recommended. We know that duration represents the sensitivity of bonds to interest rates, and is a multiplier for changes in bond prices caused by changes in interest rates. Short-duration strategy, that is, to maintain a short duration of the portfolio, so that rising interest rates have little impact on the net price. In layman's terms, a bond with a current yield of 1.9% due at the end of 2022, in fact, no matter how many times the interest rate is raised this year, three or four times, its price will not change much in the middle, such as 10bp on the interest rate. , the bond has a loss of 0.15 yuan, but the bond itself has a monthly interest rate of 0.16, and if we can hold it for a year, the bond price will always return to 100 yuan, which is an actual gain of 1.9%.
        Therefore, this type of bond is relatively safe, low volatility, but has a higher return than the deposit. The fund products under this type of bond collection are the so-called short-duration, stable bond bases. The average duration of such short-term debt portfolios is less than 3 years. And with the judgment of fund managers on interest rate risk, it may be close to the low end of the range, that is, about 1.5 years.
        What’s more, with the implementation of interest rate hikes, when the interest rate hikes start to increase once or twice, the market yield will increase, which is very suitable for reinvestment. The advantage of short-duration portfolios is that their bond maturity dates are also corresponding Short, for example, 30-50% of bonds may be due within 1 year. These funds return, and there is no need to passively sell bonds, resulting in transaction friction costs, and there are reinvested funds, which also makes the portfolio easier to seize Opportunities for new debt repricing.
        3. The short duration is defensive, but how to balance the benefits?
        I will briefly explain to you what methods of portfolio management under a typical short-term debt strategy will take into account both returns and volatility:
        The first is duration control. Reduce interest rate and credit risk and safeguard volatility
        First, in fact, we have just mentioned the defense against US bond interest rates. For a portfolio with a duration of 1.5 years, the impact of a 40bp rise in interest rates on the portfolio is about -0.60%, and the impact on a portfolio with a duration of 5 years is - 2%. But in fact, from the credit level, the duration will also fluctuate greatly and smoothly. Let’s take a sector with the most recent volatility to understand it. Take the trend of the 22-year and 25-year bonds of a leading Chinese real estate company with a Fitch rating of BBB-. The biggest drop in the month was 25 yuan, or 24%. In December, it rebounded to 90 yuan, and recently fell by 20 yuan to around 70 yuan; its 22 bonds fell by 10 yuan in November last year, a drop of 13%, and returned to 99 yuan in December. , has now fallen to around 90. Taking this example, on the one hand, I hope everyone understands that real estate bonds do have the characteristics of great volatility. On the other hand, it can be seen that the volatility of short-term bonds is significantly smaller than that of long-term bonds. Moreover, from the perspective of rebound, short-term bonds will also Because the expiration is approaching, the price returns faster and is more favored by the market. So we say that duration control plays a key role in volatility. From another perspective, maintaining volatility, when there is a long-term credit change in a certain industry or a certain entity, is actually ensuring the realization of income. We see that although leading high-quality real estate names and even state-owned enterprises may have a long way to go from default, their long-term debt is still marginal due to the current relaxation of real estate policies. A real estate company’s 29- to 30-year debt may be very It cannot return to the high point for a long time, but the 1-year bond of a high-quality real estate company may return to 100 yuan.
        Credit selection pursues stability and obtains "safety" income
        Second, through optimal credit selection, to balance income and volatility.
        We just mentioned that in the last quarter of 2021, the net price of many bonds fell sharply, and many bond bases performed unsatisfactorily. In other words, the acquisition of fixed income is based on the fact that we have assumed controllable credit risks, and ultimately we can obtain the principal and interest paid by the issuer, and the issuer will also rely on the trust of the market, and its price can remain stable. Therefore, it is very important to accurately judge whether the credit quality has deteriorated, or even whether it has breached the contract. Taking housing companies as an example, we know that when the industry is facing deteriorating fundamentals and housing companies experience tight capital chains, the lower the overall qualification ranking is, the greater the actual risk of default. And short-term debt and investment-grade funds, even if they invest in real estate bonds, basically only invest in companies that rank high in the industry, which can maximize the avoidance of substantial risks.
        Compared with most other bond funds, the credit qualification of the short-term debt strategy investment target will be relatively high, and the stability of the bond is relatively strong. The investment-grade bonds in the short-term debt portfolio generally account for 70-90% of the portfolio, even if it is high. The income subject will also have a more stringent investment rating lower limit and a lighter subject ratio. Therefore, the short-term debt portfolio can be said to have low innate credit risk to a certain extent.
        In addition, the so-called optimal allocation also includes the requirement that the portfolio has a high risk-adjusted return. It means that the portfolio cannot blindly choose high-yield and high-risk bonds. In the past six months, we have seen some credit risk events in many industries such as finance and real estate. The price adjustment of some names far exceeds the interest appreciation during the holding period. Total return may be negative. But the portfolio can't all be low-risk, low-reward A-rated bonds. Therefore, it is very important to have a good control over the investment target of the portfolio. The fund manager will make some careful selections in the environment of rising credit risk through its internal investment and research strength and resources, and choose the name of the entity and individual bonds with excellent risk-return dimension, which can help the portfolio to obtain relatively high returns. Keep volatility relatively low.
        Flexible strategy management and investment research capabilities increase alpha
        The third point is that the above control of duration and credit is actually a relatively rough strategy at the fund level. From the perspective of details, fund managers can, on the one hand, rotate through different countries or industries, including grasping short-term market trading opportunities, etc. On the other hand, through bottom-up credit research, we can grasp the benefits brought by the credit improvement of individual entities and increase the alpha of the portfolio. In addition, we can also take advantage of the current low financing costs and stable leveraged spreads. Income enhancement is achieved through a certain degree of leverage. Compared with money funds that mainly invest in certificates of deposit of financial institutions, the short-term debt strategy is much more flexible in terms of research resources, investment boundaries, and investment tools.
        Therefore, to sum up the above characteristics, the funds under the short-term debt strategy are investment products that meet the requirements of low volatility and high returns.
        4. The investment timing of the fund is not good and there is a loss. Should I wait? Is it really a good time to enter now?
        I believe that many investors have felt that the market has been difficult in the past year. The high-yield dollar bonds, or technology stocks and Chinese stocks have performed poorly. Investors may also have a high position and lack confidence when the market is low. I don’t know if The situation that should be copied. As we mentioned earlier, we always recommend that investors, no matter what investment decision they make, must first understand the fund, what the market it faces, the volatility of the market, and the product itself. investment style. At the same time, you should also clarify your investment risk preference, investment period, consider whether the market is worth investing in, and whether you want to choose products with low beta or high beta that we usually say.
        We believe that at the beginning of the interest rate hike cycle and the widening of credit spreads, our investors should be defensive, but it does not mean that defensive positions should be liquidated and not invested. We can pursue some stable and reliable returns. Short-duration high-rated bonds are a good choice, as are housing companies that can accept the baptism of the housing industry. From the specific point of purchase, the timing of risk and price response is more likely than not yet. When there is risk and the price is more expensive, the timing is better. Although the short-term debt strategy products with high comprehensive qualifications may still fluctuate in net value in the short term, its characteristics determine its volatility, and the achievability of returns is relatively high. Therefore, if investors have difficulty in predicting market risks or timing, and do not intend to make short-term trading direction judgments, and pursue low-volatility and long-term value preservation options, we recommend investors to start the interest rate hike cycle. When adjusting the credit spread, take advantage of the opportunities brought by the downward valuation, choose products that match your risk tolerance, and achieve the best long-term risk-adjusted return.
        Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only. Read more
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        • Francisco Segura : u have to stay with the time actually EBonds r the best and highest interest rate. 3 years minimum fee 5 years no fee and mind blowing interest rate.  look it the .GOV

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