The Case for Fixed Income Peak Pause Pivot Handout (INVSQ12024).pdf

Article on issues related to investing for retirement.

1. The Case for Fixed
Income:
Peak, Pause, Pivot
22 February 2024
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1

2. A QuickTour on Bond Basics

3. 3
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Fundamentals of Bonds
periodic coupon
payment
principal payment
upon maturity
Lend money by buying the bonds
Borrow money by issuing bonds1
2
3
4
Investors

4. 4
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Bonds and Sukuk
Outstanding
53%
Equity Capital
Market
47%
Malaysia Capital Market Size
Source:BPAM,BursaMalaysia
Total Capital Market value of RM3.8 trillion as at end-2023

5. 5
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Rising Bond Investments among Institutional Investors
204.2
110.0
126.3
290.1
232.6
181.3
0
500
RM billion
Pension Funds* Insurance Cos Asset Management Cos
20172022 20172022 20172022
+42%
+112%
+44%
* Malaysian Government Bonds & Sukuk only
Source:BNM&SCAnnualReport

6. 6
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Returns Comparison as at end-2023
Bondmarketreturnstendtooutperform12-monthFixedDeposits(FDs)
overthelongerterm
Source: Quantshop & Public Bank Berhad.
25.4%
56.0%
12.9%
32.4%
0%
20%
40%
60%
5Y return 10Y return
Malaysia Bond Market Index 12-Month Fixed Deposit

7. 7
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Components of Bond Funds’ Returns
1
Periodic income
earned by the
funds
Coupon Income
Bondseventuallymatureatprincipalvalueintheabsenceofdefault.
Thisunderscorestheimportanceofinvestingintobondswithsound
creditfundamentals.
2
Movement in bond
prices before the
bond matures
Capital Movements
Source:PublicMutualBerhad

8. 8
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Inverse Relationship Of Bond Yields & Prices
Bond
Yields
Bond
Prices
Bondpricesincreasewhen
bondyieldsfall,andvice-
versa.
Source:PublicMutualBerhad

9. 9
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What Happens to Bond Price as Bond Yield Moves?
Bond
Prices
CompanyABCissuedabondwiththefollowingfeatures:
Principal / par value: RM5 million
Maturity period: 3 years
Coupon rate: 5%
Yield (required return): 5%
Source:PublicMutualBerhad

10. 10
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Bond’s Valuation
Bond
Prices
Coupon
Rate
Bond
Yield
BondPrice
5% 5% 5.0 Million (par)
5% 4.5% 5.07 mil
(premium)
5% 5.5%4.93 mil(discount)
Asinterestrate
falls,pricesof
existingbonds
willincreaseas
thebond’s5%
couponismore
attractive.
Asinterestrate
increases,pricesof
existingbondswill
decreaseasthe
bond’s5%coupon
islessattractive.
Thatsaid,bonds
eventuallymatureat
principalvalueinthe
absenceofdefault.
Source:PublicMutualBerhad
What Happens to Bond Price as Bond Yield Moves?

11. What is the Case for a Fed Pivot?

12. 12
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Pivot
AsignificantpolicyshiftbytheU.S.Fedinresponsetoeconomic
conditions.TheFed’spivotcandirectlyimpactU.S.interestrates
andglobaleconomy.
Atighteningpivotinvolvesraisinginterestratestocombatinflation
oravoidoverheatingeconomy.Conversely,aneasingpivotinvolves
loweringinterestratesamideasinginflationarypressuresorto
stimulateeconomy.

13. 13
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Fastest U.S. Rate Hiking Cycle since 1980s
0.0
1.0
2.0
3.0
4.0
5.0
6.0
02468101214161820222426283032343638
Change in percentage points
Months after the first rate hike
FFR in Past Hiking Cycles
Current Cycle 2022
1994
1983
2004
1986
2015
1999
Source:Bloomberg
Current U.S. rate hiking cycle is the fastest since

14. 14
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1.9
5.1
2.5
3.8
Real GDP Core Personal Consumption Expenditure
20222023
U.S. Soft Landing Scenario?
Source:Bloomberg
Easing U.S. inflationary pressures despite stronger economic activity

15. 15
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Easing Inflationary Pressures
Fed target : 2%
Source:Bloomberg;PCE–PersonalConsumptionExpenditure
2.9
2.6
0
2
4
6
8
Dec 17 Dec 18 Dec 19 Dec 20 Dec 21 Dec 22 Dec 23
US Core PCE Index Change YoY US PCE Index Change YoY

16. 16
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Bloomberg Commodity Index
Source:Bloomberg
Relatively stable commodity prices are supportive of lower inflation
682.4
468.6
200
300
400
500
600
700
Dec 18 Dec 19 Dec 20 Dec 21 Dec 22 Dec 23

17. 17
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2.9
8.9
2.6
0
2
4
6
8
10
Dec 18 Dec 19 Dec 20 Dec 21 Dec 22 Dec 23
%
U.S. Producer Price Index (PPI)
Source:Bloomberg
Easing U.S. PPI signalled lower inflationary pressures

18. 18
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U.S. Rental Inflation
2.0
8.1
6.3
0.0
2.0
4.0
6.0
8.0
10.0
Dec 18 Dec 19 Dec 20 Dec 21 Dec 22 Dec 23
%
Source:BloombergonU.S.HomeownersEquivalentRent
Easing U.S. rental inflation signalled lower pressures on shelter inflation

19. 19
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U.S. 1-Year Inflation Expectations
6.8
3.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Dec 18 Dec 19 Dec 20 Dec 21 Dec 22 Dec 23
Source:Bloomberg
Barring any supply or demand shock, U.S. inflationary pressures are
anticipated to ease and help anchor lower inflation expectations

20. Will the Fed’s Policy Turns from
Headwinds into Tailwinds for Bond
Market?

21. 21
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A Multi-Year Easing Cycle?
5.5
lllllllllllllllllll ll l
5.25
l
5.00
lllll l
4.75
llllll
4.50
llll l
4.25
l
4.00
l llll
3.75 l
lll l
3.50 ll
lllll l
3.25
ll llll
3.00 l
l llll l
2.75 l
llll l
2.50 l llllllll
l lll lll
2.25
2023 2024 2025 2026 Longer Term
Source:Bloomberg
FOMC Dots Median

22. 22
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Gradual Rate Cut Amid Soft Landing Expectations
Source:Bloomberg
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Jan-00Jan-02Jan-04Jan-06Jan-08Jan-10Jan-12Jan-14Jan-16Jan-18Jan-20Jan-22
FFR (Upper Bound)
Cut Associated with Recession
Cut Unassociatedwith Recession

23. 23
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Are U.S. Households Less Interest-Rate Sensitive?
0
10
20
30
40
50
60
70
80
90
100
1234123412341234123412341234123412341234123
2013 2014 2015 2016 2017 2018 2019 2020 2021 20222023
Above 6% 5% to 6%4% to 5%3% to 4%Below 3%
Source:U.S.FederalHousingFinanceAgency
Nearly 9 in 10 U.S. mortgage holders have a rate below 6%

24. 24
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Fed’s Balance Sheet
0
2
4
6
8
10
Jan 06Jan 08Jan 10Jan 12Jan 14Jan 16Jan 18Jan 20Jan 22Jan 24Jan 26
USD' Trillion
The current
Quantitative
Tightening
(QT) started
in June2022
Source:FederalReserveEconomicData(FRED)
AttheJan2024FOMCmeeting,theFedsignalledpolicymakersplan
tobegindiscussionaboutslowingoreventuallystoppingthebalance
sheetreduction

25. What doesaFed Pivot Mean for
Bond Market?

26. 26
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10Y UST Yield Peaking?
0
1
2
3
4
5
6
7
8
(%)
FFR (UB) 10-Y UST
Source:Bloomberg
10Y UST yield tends to peak near the terminal FFR

27. 27
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or other materials without the prior written consent of Public Mutual Berhad. For Internal Circulation Only
MGS Yields Tend to Correlate Positively with UST Yields
-77
-66
94
45
-31
-77
-100
60
236
0
-30
-90
80
144
-39
-101
-16
58
74
4
-200
-100
0
100
200
300
2019 2020 2021 2022 2023
Change in 10Y Government Bond Yields (bps)
MalaysiaUnited StatesSingaporeThailand
Source:Bloomberg

28. 28
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or other materials without the prior written consent of Public Mutual Berhad. For Internal Circulation Only2018 (7 mth)
2006 (15 mth)
2000 (8 mth)
1995 (5 mth)
1989 (4 mth)
-250
-200
-150
-100
-50
0
50
100
-3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12
basis points (bps)
Month
Cumulative change in 10-Yr UST before and after peak (Year & length of pause)
Source:Bloomberg
10-Year UST Yield Movement
10Y UST yield tends to stabiliseor move lower after final rate hike

29. 29
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or other materials without the prior written consent of Public Mutual Berhad. For Internal Circulation Only
17.0%
14.0%
5.8%
7.3%
41.2%
42.2%
35.8%
2.6%
February 1995 May 2000 June 2006 December 2018
1-Year Return5-Year Return
UST Returns after FFR Peaked
5-YearreturnafterFFR
peakedinDecember2018
cyclewasimpactedbythe
aggressiveFFRhikesin
2022-2023tocombat
40-yearhighinflationin
theU.S.
ThechartillustratesBloombergUSTindex1-Yearand5-YearreturnafterFFRpeakedinthepast4interestratecycles.
Pastperformanceisnotareliableindicatoroffutureperformance
Source:Bloomberg

30. 30
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Reinvestment Risk on Shorter-Tenured UST
Basedonpast4cycleswhenFFRpeaked,investorsofultra-shortUSTface
higherreinvestmentriskasincomereturntendstodeclinequickly1yearor2
yearsafterfinalratehikeduetosubsequentratecuts.
Source:Bloomberg
7.0
6.4
5.3
2.6
4.9
3.7
4.9
1.5
5.3
2.4 2.4
0.1
Feb 1995 May 2000 Jun 2006 Dec 2018
%
1Y UST Yield when FFR Peak1Y After Peak2Y After Peak

31. BondFund’s Portfolio Positioning

32. 32
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Longer-Tenured Bonds Have Higher Price Sensitivity
Source:BPAM,PublicMutualBerhad
5.20
4.20
3.20
6.40
4.40
2.40
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
-25 bps 0 +25 bps
Change in yield (bps)
1-year estimated holding period return based on yield as at end-Jan 2024 (%)
5Y bond10Y bond
Thishypotheticalexampleof1-yeartotalreturnincludescouponincomeof5Yand10YgenericRinggitcorporatebondandthe
priceappreciation/depreciationinresponseto25bpsyieldmovement.Forillustrativepurposeonly,itdoesnotguarantee
futureresults.

33. 33
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Malaysia’s Bond Yield Curve -Upward Sloping
1Y 2Y 3Y 5Y 7Y 10Y 15Y 20Y
Gov-MGS 3.29 3.37 3.45 3.61 3.73 3.80 3.99 4.10
AAA 3.65 3.71 3.78 3.89 3.98 4.05 4.19 4.32
AA1 3.74 3.80 3.86 3.97 4.08 4.17 4.36 4.57
AA2 3.83 3.89 3.95 4.06 4.18 4.29 4.54 4.80
AA3 3.91 3.97 4.02 4.14 4.28 4.41 4.71 5.02
3.00
3.50
4.00
4.50
5.00
5.50
(%)
Source:BPAM
Longer-tenured bonds provide higher income potential

34. 34
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Ringgit Corporate Bonds’ Tenures
Source:AsianBondsOnline
Well-diversifiedtenuresoftheoutstandingRinggitcorporatebonds
provideopportunitiesforportfoliorebalancingactivities.
1-3 years
19%
>3-5 years
18%
>5-10 years
34%
>10 years
29%

35. 35
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Focus on Higher Quality Bonds
Source:BPAM
93% of rated Ringgit corporate bonds comprises AA and AAA rating,
translating into ample investment opportunities for our bond funds.
49.2%, AAA
44.2%, AA
6.2%, A0.2%, BBB
0.3%, Others

36. 36
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Example of Bonds/Sukuk that We Invested
Credit Rating: AA-
Profit Rate: 4.84%
Tenure: 10 Years
Credit Rating: AA3
Profit Rate: 4.45%
Tenure: 5 Years

37. 37
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Example of Bonds/Sukuk that We Avoided
•In2014,MARCassignedSenai-
DesaruExpresswayBerhad(SDEB)
sukukratingofBBB-following
restructuringofitsdebt.
•InDecember2021,SDEB’ssukuk
wasdowngradedfromBBB-toBB.
InJune2022,thesukukwas
downgradedfurthertoB+fromBB.
Subsequently,theratingwas
withdrawnon20October2022.
Source:MARC

38. 38
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•IftheU.Seconomyremainsresilientanddisinflation
progressisslower-than-expected,theFedcouldkeep
rateshigherforlonger.Inthiscase,bondfundscould
benefitfromhigherincomepotential.
•IftheU.Seconomyentersaslowdownanddisinflation
progressisfaster-than-expected,theFedmaycut
ratestoensuremonetarypolicyisnotoverlyrestrictive.
Inthiscase,bondfundscouldbenefitfromhigher
capitalgainspotential
Two Potential Scenarios
Higher for
Longer
Lower and
Sooner
Theabovescenariosarenotmeanttobeexhaustive

39. Investors’ Positioning

40. 40
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A Contrast of Bond/SukukFund Performance
Source:Lipper
Pastperformanceisnotareliableindicatoroffutureperformance.
14.2 14.1
12.8 12.5 12.4
11.8
11.4 11.2
10.4
0.6
-3.1
0.5
1.1
-1.5
1.7
1.1 1.2 1.3
-5
0
5
10
15
PENTBF PIINFBF PIBOND PBOND PSKF PSTBF PSBF PISTBF PISBF
2019 to 2020 (Lower Interest Rates)2021 to 2022 (Rising Interest Rates)

41. 41
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A Review of Bond/SukukFund Performance in 2023
Source:Lipper
Pastperformanceisnotareliableindicatoroffutureperformance.
Dataasatend-December2023
8.1
7.6 7.5
7.3
6.8
6.5 6.3 6.2
4.9
4.5
0.0
5.0
10.0
PIINFBFPeSukuk PIBOND PSKF PENTBF PBOND PISTBF PSTBF PISBF PSBF

42. 42
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Monthly Return of Malaysian Bond Market
Year/MonthJanuaryFebruaryMarch April May June July AugustSeptemberOctoberNovemberDecemberTotal Return
2013 0.2% 0.4% 0.3% 0.7% 0.2% -0.9% -1.3% 0.1% 1.3% 1.3% -1.5% -0.1% 0.8%
2014 0.1% 0.6% 0.3% 0.6% 0.2% 0.5% 0.9% 0.2% 0.4% 0.6% 0.1% -0.8% 3.8%
2015 1.7% 0.3% 0.4% 0.6% 0.0% 0.0% 0.2% -1.4% 0.9% 1.2% 0.2% 0.5% 4.9%
2016 1.6% 0.0% 0.8% 0.0% 0.2% 1.2% 1.3% 0.4% 0.4% -0.2% -3.8% 1.5% 3.4%
2017 1.0% 0.6% -0.3% 0.9% 1.0% 0.0% 0.2% 0.8% 0.3% -0.3% 0.7% 0.5% 5.6%
2018 0.2% 0.1% 0.7% -0.9% 0.1% 0.4% 0.9% 0.6% 0.1% 0.0% 0.4% 0.8% 3.6%
2019 0.7% 0.8% 1.4% 0.1% 0.6% 1.4% 0.8% 2.4% -0.1% -0.5% 0.7% 0.6% 9.2%
2020 2.1% 2.0% -3.1% 3.7% 0.2% -0.4% 3.0% -0.6% 0.1% 0.4% -1.3% 1.7% 8.0%
2021 -0.2% -2.3% -0.9% 0.8% -0.1% 0.6% 1.0% 0.0% -0.6% -1.0% 1.0% 0.2%-1.7%
2022 -0.5% 0.3% -1.1% -3.2% 2.2% -0.4% 2.6% 0.2% -2.7% 0.7% 2.3% 0.7% 1.0%
2023 2.3% -0.3% 0.5% 1.4% 0.3% -0.2% 0.4% 0.1% -0.6% -0.5% 2.1% 0.8% 6.3%
Source:Quantshop’sMalaysianGovernmentBondIndex
Domestic bond market tends to recover from short-term volatility.
Positive monthly return Negative monthly return

43. 43
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Fixed Deposit (FD) Rate
2.83
1.50
2.00
2.50
3.00
3.50
Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23
Stabilising12-Month FD rate amid unchanged OPR.
Source:BNM

44. 44
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Lookingahead,theprospectofpeakingU.S.interestratesand
ratecutcyclepresentopportunitiesforinvestorswhoaresuited
toholdbond/sukukfundswithintheirinvestmentportfolios,to
earnpotentiallyhigherreturnsthanFDoverthelongerterm.