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Bond durations: what wealth managers recommend

Citywire Asia, Sep 18, 2019

Bonds are integral to a diversified portfolio, but long-term options are not the best buy in current market conditions, wealth managers told Citywire Asia.

Sanctum Wealth Management, for example, is advising its HNW clients to invest in moderate duration bonds as they are less sensitive to interest rate changes.

CIO Sunil Sharma said the case for long-term bonds is okay for the next few months. ‘But, at some point a spike in yields is possible and therefore we would rather not be caught wrong-footed,’ he said.

Sanctum recommends a diversified portfolio of AAA-rated corporate bonds, banking and PSU bond funds, and short- and medium-term bonds.

Meanwhile, HSBC Private Banking is focusing on short-term bonds, and in particular, those with three to five years at the upper end of the maturity range.

Fan Cheuk Wan, its chief market strategist for Asia expects the global economic slowdown and dovish tilt of global central bank policies to extend the low yields environment for even longer.

‘The global flight to safety will continue to suppress long-dated US Treasury yields at historically low levels and keep the yield curve flat,’ she said.

HSBC favours USD corporate bonds with BB to mid-investment grade ratings. It also searches for opportunities in higher-rated USD corporate bonds in the US and emerging markets.

On top of that, the lender is bullish on emerging market local currency bonds, due to their attractive carry, structural reforms and supportive drivers from central bank stimulus.

Those in China, India, Indonesia, Brazil and Russia currently have the most attractive risk-reward profiles, Fan said.

VP Bank similarly recommends short-term bonds. The Liechtenstein-headquartered lender noted that markets were already pricing in a recession and their perspective could only improve.

When it comes to corporate bonds, it prefers non-cyclical sectors with ratings in the upper investment grade. But it avoids carmakers, airlines and retailers.

‘Low interest rates have made companies leverage up. There is a wall of fallen angels ahead,’ said Bernd Hartmann, VP Bank’s chief strategist.

He added that investors should consider that benchmark durations have improved over the last few years. This means interest rate sensitivity has increased for most investors.

‘In our view, neither duration risk nor credit risk is attractive at the moment. One alternative is absolute return bond strategies. Another alternative is taking liquidity and complex risk premia like private debt funds,’ he said.