The Rare Amazing Bond Run

Image result for image of bond fund

Those who are often reading economic news may have noticed the topic of bonds during this time. Recently, the US stock market correction is also due to the threat of bond yield curve inversion. There shouldn’t be anyone who hasn’t heard of it now. I have also released an article “Should We Invest into Bonds?” previously sharing how we can buy bond as retail investors with small capital.

In fact, in the my unit trust investment course training, we propose using bond as our defense mechanism, not an investment tools. Because its returns are very low, it does not worth our effort and attention. For reality, bond is basically a rich man’s doll. However, something turns up spectacular about bond yield this time.

Yield Curve Inversion

In this high volatile stock market investment environment, many wealthy stock players quit stock but rush into bond in order to hedge their asset value. Their unusual movement has caused the purchase price of bond rising slowly. As a result, bond’s interest rate has gradually decreased inversely. The resulting effect is the formation of the curve in bond interest rate of returns in the long-term and short-term crossing over each other. This phenomenon is called “yield curve inversion” causing stock market correction a few times.

Let me first explain the meaning of “curve inversion” in layman’s terms; In a normal environment, the interest rate of long-term bonds will be higher than the short-term (just like the fixed deposit rate). But in the current market situation, many people irrationally enter the bond market, they prefer long-term bonds for long term security sake in order to park their asset and therefore causes the return on interest rates for long-term bonds becoming lower than the short-term interest rate. Because the prices of long term bond rising faster than short term bond.

And those who hold short term bond change hand in order to transfer into long term too.  Because they merely seek stable instrument to keep their asset secure for longer term, interest return rate becomes secondary concern.  It shows the degree of insecurity about the stock market and the economy from these rich folks.  

Since these wealthy individuals have been entering the bond market consistently, the purchase prices of these bond keep on rising. This is also true for bond funds in Malaysia as ship rises according to the rising water level as the Chinese idiom says it. Their annual rates of return have far exceedingly. The most conservative bonds (according to FSM’s risk rating of “2”) have an annual rate of 8-11.5% (Table A). The high-risk with a rating of “5”, the RHB Emerging Market Bond is 13.9% astonishingly high.

Table A ~ Bond funds’ return has been spectacular lately.

If you have five-figure cash, when you put it in, such as AmBond fund, you will immediately see a very significant amount of return. For example, since the currency exchange rate from Ringgit to the US dollar is too high currently, I placed a portion of it into AmBond temporary before I send it to my son in USA later. To my surprise, I suddenly seen a profit of RM 1,028.04 registered in my account just shortly after 3 weeks. With the profit earned in this way, I am no longer having to worry about the depreciation of the Malaysian ringgit any more in the future! One of the members of our Platinum group has also told me that she has also invested in AmBond fund just a month ago and now earns RM 1,286.81 additional profit in her account!

With such a high return in bond fund, which banks do you need to compare and look for higher fixed deposit rates to park your idle capital?

Bond risk

But of course, some of you may be wondering; after all, high returns do also have high risks!

Yes, as normal investment instrument, bond funds also carry with risks. But its risk will be much lower than equity funds. That is to say, if its price falls, it will not suddenly drop to “hell” like an equity fund. It will fall slowly, and you will have ample time to escape. In the event of a flight, you only need to do inter fund house switch to the money market fund, such as RHB Money Market Fund, Pacific Cash Fund, BIMB Dana Al-Fakhim, RHB Cash Management Fund 2 and so on. And this switching is absolutely free. The price difference is just within the day of the transaction.

This fall in price usually occurs when foreign bond dealers exiting the country. The risk of Malaysian bond currently visible may be at September later. It will be the time when FTSE Russell reviews whether Malaysian government bonds should remain in their index group. In the event of the unfortunate case, Malaysia bond being abandoned, foreign bond dealers may flee the bond market in Malaysia. If these happen, it might cause bond price to fall. But some analysts say the impact may not be great, as most bond buyers are local institutions.

In any case, we have to see whether the bond price will be affected. But then we don’t have to wait until September in order to consider whether to deposit cash into AmBond fund, do we? Will the loss in a month be great? What happens when there is no changes? Isn’t that lost also a valuable learning experience loss for us in vain?

Finally, please keep in mind that such a high-return bond fund is not easily found, it rarely appears in the history of investment. The current stock market is sluggish, and the economic outlook is highly pessimistic. Only this phenomenon can contribute to such a high return on bonds.

Why not take the opportunity to seize the investment opportunities today?

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