To The Moon

Bond yields are currently at the highest level they have been in years, providing investors with the opportunity to earn attractive income.

In the US, two-year Treasury bond yields are trading around 4.0 – 4.5 percent, while 10-year Treasuries are around 3.5 – 4.0 percent.

Can these rates last?

Although bond yields are at multi-year highs, such lucrative yields may not last as the global tightening cycle approaches its end.

With further evidence of US inflation moderating, markets now believe that the US Federal Reserve (Fed) is likely to hike rates just once more in May before stopping.

A number of central banks in Asia have also paused on monetary policy tightening amid higher risks to global growth. In a surprise pivot, the Monetary Authority of Singapore (MAS) left its monetary policy unchanged after tightening it five times since October 2021 to combat rising inflation.

When will rates start to fall?

At the moment, a rate cut in 2023 is not the Fed’s base case.

That said, some analysts think the Fed will start cutting rates this year in the event of a deeper-than-expected recession. Recent data show US employment growth, retail sales and manufacturing production declining in March, suggesting that the economy is losing steam.

In addition, markets tend to move before policy changes, and bond yields are already starting to ease ahead of rate cuts. While still at attractive levels, US and Singapore bond yields have been trending down since February.

Figure 1: 2-year and 10-year US Treasury yields (%)

Source: Bloomberg/UOBAM Chart data from 1 Jan 2008 to 29 Mar 2023

Figure 2: Singapore government bond yields (%)

Source: Monetary Authority of Singapore. Chart data from 1 Jan 2022 to 29 Mar 2023

Bond funds offer a win-win solution

Against this backdrop, bond funds offer the opportunity to lock in today’s yields and reduce reinvestment risk. This is the risk that when their existing bonds mature, investors will receive a lower income from their subsequent bond investments due to a future drop in interest rates.

Given fears of an economic slowdown, bond funds can also act as a recession hedge by serving as a safe haven while still providing income.

In particular, investment-grade (IG) bond funds offer compelling risk-reward opportunities for investors by providing yield levels that would only have been possible previously by investing in riskier bonds. IG bonds receive higher ratings by credit rating agencies (BBB and above) and are seen to have a lower risk of default.

Here is the weighted long term average default rate for various bond ratings:

Source: S&P Global Ratings Research and S&P Global Market Intelligence, data from 1981 to 2021

UOBAM bond solutions

At UOBAM, we have several money market and bond fund options that range in duration and credit rating [1].

Source: UOBAM, as at 31 March 2023

For conservative investors or those with a shorter investment horizon, the United SGD Money Market Fund and the United SGD Fund sit on the lower end of the risk-return spectrum.

Both funds invest primarily in high-quality, short-term securities issued by governments and companies with robust credit ratings. They also have short durations, which make them less sensitive to changes in interest rates. This means they tend to offer more stable returns compared to longer duration bond funds.

In terms of yields, the United SGD Money Market Fund and the United SGD Fund offer a weighted average yield to maturity (YTM) of 3.45 percent and 4.64 percent respectively, as of 31 March 2023. This is the weighted average YTM of all the bonds in a fund’s portfolio.

YTM is the annualised return that a bond would generate if held to maturity, assuming interest payments are re-invested. Note that a fund’s holdings can change and therefore, so can the YTM.

Here is what else to consider when evaluating the two bond funds.

1.  I want the flexibility to access my money anytime

United SGD Money Market Fund

$UNITED SGD MONEY MARKET "A1" (SGDHDG) ACC(SGXZ56370984)$

$UNITED SGD MONEY MARKET "D" (SGD) ACC(SGXZ19187566)$

As of 31 Mar 2023

• Effective duration: 0.10 years

• Credit rating: AAA

• Weighted average YTM: 3.45 percent

Fund highlights:

• Low risk: Invests mainly in Singapore Treasury bills (T-bills) and MAS bills to provide stable returns and capital preservation. During periods of volatility triggered by COVID-19 and the uncertain interest rate environment, the Fund experienced zero drawdowns.

Figure 3: United SGD Money Market Fund experienced no drawdowns despite recent volatility

Source: Morningstar, as at 31 March 2023, SGD terms. Performance is based on United SGD Money Market Fund Class Z SGD portfolio, on a NAV basis, with dividends reinvested if any.

Consistent performance: Since inception, the Fund has delivered consistent positive returns. On a year-to-date, 1-year, and 3-year basis, the Fund's performance also ranks among the top 25 percent against peers in the same category [2].

Figure 4: United SGD Money Market Fund calendar year returns (%) since inception in 2018

Source: Morningstar, as at 31 March 2023. Performance is net of fees and is based on oldest share class, United SGD Money Market Fund Class Z SGD portfolio in SGD basis, on a Net Asset Value (NAV) basis, with dividends reinvested, if any.

• No lock-up: The liquid and short duration nature of the Fund means investment proceeds can be quickly withdrawn and received within one business day.

• Earn while you wait: The Fund is also ideal for investors who want to park their cash to wait for investment opportunities, but still earn some returns in the meantime.

2.  I want capital preservation with the potential to earn attractive regular income  

United SGD Fund

$UOB UNITED SGD "A" (SGDHDG) INC(SG9999010805)$

$UOB UNITED SGD "S" (SGDHDG) INC(SGXZ16137382)$

As of 31 Mar 2023

• Effective duration: 1.14 years

• Credit rating: BBB+

• Weighted average YTM: 4.64 percent

Fund highlights

• Attractive income: The annualised dividend yield of 5.0 percent [3], paid out monthly (Class S Dist), is attractive for investors seeking regular income.

• Stability: Holds high-quality, short-term investment grade bonds to preserve capital, and buffers against market instability with lower drawdowns compared to peer asset classes during market volatility.

Figure 5: United SGD Fund experienced lower drawdowns during periods of volatility

• Long-term track record: The United SGD Fund has delivered positive calendar returns for 22 out of 24 years since the fund was incepted in 1998.

Figure 6: United SGD Fund calendar year returns (%) since inception in 1998

Source: UOBAM, as of 31 March 2023. Fund performance sourced from Morningstar. Performance is net of fees and is based on United SGD Fund Class A (Acc) SGD, in SGD terms, on a NAV basis, with dividends and distributions reinvested, if any.

Important notice & disclaimers

This document is for general information only. It does not constitute an offer or solicitation to deal in units in the Fund (“Units”) or investment advice or recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. The information is based on certain assumptions, information and conditions available as at the date of this document and may be subject to change at any time without notice. No representation or promise as to the performance of the Fund or the return on your investment is made. Past performance of the Fund or UOB Asset Management Ltd (“UOBAM”) and any past performance, prediction, projection or forecast of the economic trends or securities market are not necessarily indicative of the future or likely performance of the Fund or UOBAM. The value of Units and the income from them, if any, may fall as well as rise, and is likely to have high volatility due to the investment policies and/or portfolio management techniques employed by the Fund. Investments in Units involve risks, including the possible loss of the principal amount invested, and are not obligations of, deposits in, or guaranteed or insured by United Overseas Bank Limited (“UOB”), UOBAM, or any of their subsidiary, associate or affiliate (“UOB Group”) or distributors of the Fund. The Fund may use or invest in financial derivative instruments and you should be aware of the risks associated with investments in financial derivative instruments which are described in the Fund's prospectus. The UOB Group may have interests in the Units and may also perform or seek to perform brokering and other investment or securities-related services for the Fund. Investors should read the Fund’s prospectus, which is available and may be obtained from UOBAM or any of its appointed agents or distributors, before investing. You may wish to seek advice from a financial adviser before making a commitment to invest in any Units, and in the event that you choose not to do so, you should consider carefully whether the Fund is suitable for you. Applications for Units must be made on the application forms accompanying the Fund’s prospectus.

Distributions will be made in respect of the Distribution Classes of the Fund. Distributions are based on the net asset value (NAV) per unit of the relevant Distribution Class as at the last business day of the calendar quarter or month. The making of distributions is at the absolute discretion of UOBAM and that distributions are not guaranteed. The making of any distribution shall not be taken to imply that further distributions will be made. UOBAM reserves the right to vary the frequency and/or amount of distributions. Distributions from fund may be made out of income and/or capital gains and (if income and/or capital

gains are insufficient) out of capital. Investors should also note that the declaration and/or payment of distributions (whether out of income, capital gains, capital or otherwise) may have the effect of lowering the NAV of the relevant fund. Moreover, distributions out of capital may amount to a reduction of part of your original investment and may result in reduced future returns. Please refer to www.uobam.com.sg and Fund's prospectus for more information.

This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

UOB Asset Management Ltd. Company Reg. No. 198600120Z

Sources:

[1] Source: UOBAM, as of 31 Mar 2023. Distributions (in SGD) are not guaranteed. Distributions may be made out of income, capital gains and/or capital. For United SGD Fund (Class A Dist), as of 30 June 2023, the distribution frequency will be changed to monthly distribution.

[2] Source: UOBAM, Morningstar, as of 31 March 2023. Peers are decided through the use of objective filters from Morningstar.

[3] Distributions (in SGD) are not guaranteed. Distributions may be made out of income, capital gains and/or capital. This relates to the disclosed distribution policy as set out in the Fund’s prospectus.