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A Fin24 user wants to know if now is a good time to invest in bonds. He writes:
What determines the yield on government or other bonds, both internationally and in South Africa?
What effect will the US tapering of bond purchases have on bond yields?
Is now a good time to invest in a bond unit trust either locally or internationally?
David Galloway, strategist at Sanlam Investments, responds:
Let's look at your questions individually.
1. What determines the yield on government or other bonds both internationally and in South Africa?
The pricing of the SA bond is determined by the yield on similarly dated US treasuries, the SA or country/sovereign risk premium and the SA currency risk premium measured by the long-term inflation rate differential (between SA and the US).
For corporate bonds, there will typically be some sort of premium over the government bond yield. The size of the premium will depend on the rating of the corporate debt (for example, AAA or BBB debt will have very different risk premiums reflecting the risk of a corporate default).
Factors that affect the yield on SA government bonds will include the size of the fiscal deficit or, more specifically, the funding requirement of the government over the coming fiscal years and/or geopolitical risks.
The price and/or yield on the US treasury, typically viewed as the risk free asset, will be a function of the state of real economy and inflation expectations.
2. What effect will the US tapering of bond purchases have on bond yields?
Since there is reduced demand for US treasuries and mortgage backed securities, bond yields willover time rise back to a more normalised level.
Quantitative easing (QE) or tapering kept bond yields artificially low.
3. Is now a good time to invest in a bond unit trust either locally or internationally?
SA bond yields are approaching levels we would consider attractive, despite the perceived risk of investing in SA bonds.
With real yields of between 2.5% and 3%, investors could consider averaging into a bond fund (i e add to the unit trust on a monthly basis rather than investing a lump sum today).
We are less upbeat about the prospects for global bonds at this stage of the normalisation process.
At yields of around 3% on 10-year US treasuries, one could consider a small investment in a developed market bond fund.
- Fin24
Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.
What determines the yield on government or other bonds, both internationally and in South Africa?
What effect will the US tapering of bond purchases have on bond yields?
Is now a good time to invest in a bond unit trust either locally or internationally?
David Galloway, strategist at Sanlam Investments, responds:
Let's look at your questions individually.
1. What determines the yield on government or other bonds both internationally and in South Africa?
The pricing of the SA bond is determined by the yield on similarly dated US treasuries, the SA or country/sovereign risk premium and the SA currency risk premium measured by the long-term inflation rate differential (between SA and the US).
For corporate bonds, there will typically be some sort of premium over the government bond yield. The size of the premium will depend on the rating of the corporate debt (for example, AAA or BBB debt will have very different risk premiums reflecting the risk of a corporate default).
Factors that affect the yield on SA government bonds will include the size of the fiscal deficit or, more specifically, the funding requirement of the government over the coming fiscal years and/or geopolitical risks.
The price and/or yield on the US treasury, typically viewed as the risk free asset, will be a function of the state of real economy and inflation expectations.
2. What effect will the US tapering of bond purchases have on bond yields?
Since there is reduced demand for US treasuries and mortgage backed securities, bond yields willover time rise back to a more normalised level.
Quantitative easing (QE) or tapering kept bond yields artificially low.
3. Is now a good time to invest in a bond unit trust either locally or internationally?
SA bond yields are approaching levels we would consider attractive, despite the perceived risk of investing in SA bonds.
With real yields of between 2.5% and 3%, investors could consider averaging into a bond fund (i e add to the unit trust on a monthly basis rather than investing a lump sum today).
We are less upbeat about the prospects for global bonds at this stage of the normalisation process.
At yields of around 3% on 10-year US treasuries, one could consider a small investment in a developed market bond fund.
- Fin24
Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.
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