Fixed income markets show signs of improving amid rising rates
Nabilah Khaleeda
August 4, 2023 13:39 MYT
August 4, 2023 13:39 MYT
Jesse Liew, Chief Investment Officer of Fixed Income, Principal Southeast Asia, says although inflation is trending down, it remains a sticking point for central banks and they are likely to keep policy rates on hold or consider modest hikes - File
KUALA LUMPUR: As global interest rates continue to rise, fixed income markets have shown signs of improvement this year.
The rally in bond markets has been driven by expectations that rate hikes may pause or slow in the second half of the year.
The global economic environment is characterised by concerns about inflation, particularly in developed markets such as the US and UK where inflation rates remain higher than desired.
Jesse Liew, Chief Investment Officer of Fixed Income, Principal Southeast Asia, believes that although inflation is trending down, it remains a sticking point for central banks and they are likely to keep policy rates on hold or consider modest increases.
As for Malaysia's bond market, he is optimistic because inflation is on a downward trend.
Liew predicts that the country's central bank, Bank Negara, will keep interest rates at current levels to support robust domestic economic activity amid slowing global growth.
"Bonds offer higher yield carry, especially if global growth slows and central banks respond by cutting interest rates," Liew added.
Liew also addressed concerns about the impact of the weakening ringgit on ringgit bonds.
He explained that the performance of ringgit bonds has remained strong, easing concerns about the correlation between the currency and the bond market.
"Investors are confident in the strength of these fixed income assets," he said.
"The correlation between the currency and the bond market is not as pronounced and investors remain positive on these fixed income assets," he added.
Looking at global markets, Liew said some regions, such as Japan, offer stability and appeal to investors, while the UK could see several interest rate hikes due to ongoing inflation concerns.
"Institutional investors continue to show interest in fixed income assets due to their liquidity benefits and the need for portfolio diversification," said Liew.
"Bonds offer a publicly traded asset with liquidity, making them particularly valuable compared to less liquid alternative assets."
He also noted that both government and corporate entities are likely to continue to raise funds in the fixed income market, supported by robust investor demand.
Looking ahead, Liew encouraged investors to take a longer-term view, noting that economic data and central bank decisions can cause volatility in the interest rate environment.
However, he stressed that understanding and analysing trends will be key to effectively managing market volatility.
"Investors should start by diversifying their portfolios and building their cash reserves to prepare for potential volatility," he said.
"Fixed income markets are poised for improvement in 2023, with investors showing interest in the asset class amid a changing global economic landscape.
"Overall, we see positive signs for fixed income markets in 2023. Investors should continue to focus on economic fundamentals and consider fixed income as a valuable component of their investment strategy," Liew said.