Bond Focus : Trade, Not Invest, In Deflation
This post was written for www.hnworth.com, a site targeting high net worth individuals in Singapore.
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A solemn week with a unique experience of national solidarity with fellow citizens, all of us bound together by the loss of the nation’s founding father, LKY, and it does look like life will not be the same again, missing the complacency that comes from the knowledge that someone is watching over you.
It is the same for bonds, the safe instruments of fixed income that provides higher level protection to holders in the event of default.
As it is, the issuance in the US has been brisk with March on track to be the second busiest month in history, only losing to Sep 2013, in terms of total debt issued. It is the same for Europe as the 2 great engines of the global economy attempt the task of returning the world back to growth.
The icing on the cake is that we have all central banks armed with the “whatever it takes” mindset, determined to make sure that it will happen.
There has been nearly 30 rate cuts year to date, all countries in a hurry to combat deflation and spur growth. This has resulted in the creation of a negative yield world that has become accepted as natural even as it wreaks havoc in many a portfolio.
Singapore is the only developed country of the lot that is bucking the trend, tackling deflation with her unique monetary policy that is foreign exchange based and inflation led. As such we have short end interest rates breaking 6 year highs even as our latest CPI print was at -0.3% yoy in February, falling for the 4th consecutive month in the longest drop since 2009.
For inflation in Singapore begets currency strength and the unintended outcome of lower interest rates which, in theory, fuels domestically generated inflation as currency strength only succeeds in containing imported inflation.
Yet the converse is true for deflation, a situation that does not usually occur too often in this resource poor country that is also a global trade leader, chalking the highest surplus as a % of GDP in the world.