Volatility in bond markets in the past three months has made a significant impact on the portfolios. The market volatility is caused by inflation that remains high as well as the expectations of more aggressive monetary tightening of The Fed. When monetary tightening is carried out (rising interest rates), it causes bond yields to rise (bond prices to fall).
Here are the market update details that we can convey:
- Since 2021, worldwide inflation has risen sharply as a result of supply chain disruptions, energy crisis, and the post-Covid-19 economic recovery. In 2022, inflation rose higher due to high commodity prices and the prolonged lockdown in China exacerbated the disruptions to global supply chains.
- To slow the rising inflation, the central banks conduct monetary tightening. Excess liquidity must be reduced. Central banks may begin tapering, hike interest rates, and reduce asset values to decrease liquidity.
- At the FOMC meeting in May 2022, The Fed increased its benchmark interest rate by 50 bps. A 50 bps hike is still likely to happen in the next few FOMCs if needed. In addition, The Fed also plans to reduce asset values by USD 47.50 billion per month starting June 2022, and raise 95 billion per month starting September 2022. The reduction is much larger compared to similar actions carried out in 2016-2018.
- Looking at historical data, when the Fed raised the interest rates to 2.25% in 2015-2018, the U.S. Treasury yields rose to 3.20%. As of 17 May 2022, the markets sees the possibility that the Fed could raise interest rates to 3.00% by the end of 2022 (51.90% probability). If interest rates rise according to market calculations, it is likely that the U.S. Treasury yields will rise beyond 3.00%.
- The U.S. Treasury is the benchmark for bonds worldwide. That means any increase will cause movements in other bonds around the world including in Indonesia (INDON/INDOIS/FR). With the expectation that the U.S. Treasury yields will continue to rise, price declines will potentially occur in INDON/INDOIS/FR.
In response to the above conditions, strategies that can be taken are:
- For customers who are looking into buying bonds:make purchases gradually. Preferably buy bonds with a short-intermediate tenor (under 10 years).
- For customers who already owned short-term bonds: if you own long tenor bonds, you can rebalance the portfolio by shifting the investments towards short-intermediate term bonds (under 10 years).
- For customers who owned long-term bonds:if you own long tenor bonds, you can reassess whether you can get further price reductions. If not, you can rebalance your portfolio to short-intermediate term bonds (short-intermediate term bonds).
For more information about market conditions, investment strategies, and investment value, please contact BCA branch office that serves investment transactions.