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Bonds seen unlikely to offer big capital gains in 2020

By Goh Thean Eu  
December 10, 2019

Bond investors are unlikely to have the kind of outsize capital gains seen this year in 2020 because major central banks have limited room to cut interest rates any more, according to Desmond Soon, head of investment for Asia ex-Japan at US fund manager Western Asset Management.

Singapore-based Mr. Soon and his team manage US$4.89 billion of bonds.

Bond prices move inversely to yields. Rate cuts drive up bond prices, lowering the yields. There are currently over $12 trillion worth of bonds trading at negative yields.

"Those numbers are quite staggering and have resulted from very accommodative central bank policies in an environment whereby economic uncertainties have never been greater," Mr. Soon says in an interview with Asia Asset Management.

"There's a tug of war going on, principally between the US and China, on multiple fronts such as trade and technology” and there is “an unprecedented amount of economic and political uncertainties”, he adds.

One option for bond investors seeking higher yields is to buy higher-risk debt, but Mr. Soon points out that the quality of issuers is even more important when yields are near zero or in negative territory.

"During such times, you really have to seek out quality issuers, making sure the bonds of companies and countries that you invest in have low probability of default," he says.

Although some investors favour short-term debt on the assumption that they offer more certainty about repayment, Mr. Soon is cautious.

"If the company is only able to issue one-to two-year bonds, its ability to refinance these bonds at their maturity becomes questionable. If a company has strong fundamentals, it won't resort to issuing short-dated bonds,” he explains. “Usually, companies issue short-dated bonds as there is little or no demand for their longer-dated bonds as investors are uncertain of their longer-term viability.”

He sees some bright spots in emerging-market local currency bonds and singles out Indonesia, India and the Philippines as potentially generating "decent returns of approximately 5%-6% in 2020".

He says his company has been overweight on India and Indonesia for some time, and recently went overweight on the Philippines.

"We see these countries having strong domestic economies, and they are somewhat less affected by the escalation in [trade] tariff talks," he says. "In an uncertain economic and geopolitical environment, being able to generate bond returns of 5%-6% will be considered to be very attractive."

California-based Western Asset Management had $452.9 billion of assets under management as at September 30, 2019.