Bond Yields Rising, Good Or Bad?

If you have been reading / hearing / watching the financial news recently, the term “rising bond yields” is getting commonplace. At first glance, you may think it is good news; come on, who does not like rising yields? However, this is not dividend yield, and a rising bond yield is likely to have an effect in the markets.

Bonds 101

 

I had written a short piece on bond yields and coupon rates back here. Essentially, bond yield is calculated by dividing the coupon rate over the current bond price. With the coupon amount (or the numerator) fixed, the bond yield ratio will fluctuate according to the changes in the denominator, which is the prevailing bond price.

 

With this, a rise in bond yield meant the price of bond is falling, and that led to the conclusion that bonds in general are not in favour and are facing a sell-down.

 

Do note that the bond yields in question are referring to U.S. treasury bonds, which are bonds issued by the U.S. government, and specifically the U.S. 10-Year Treasury Bond yield, typically used as a benchmark. Though it may look insignificant, the bond yield movements do have an influence on the U.S. equity markets and in turn the global economy as a whole.

 

Why Rising Yields?

 

The common narrative for the rising bond yield is due to the expectations of an equities market recovery, fuelled by the rapid development and deployment of COVID-19 vaccines. This probably caused a number of investors to sell bonds and start to jump back onto the stock bandwagon.

 

Another narrative is the expectation of inflation. The past stimulus packages and programs that had helped propped the economy had created a slosh of liquidity across the markets, resulting in equity prices going up, thus sparking a possible inflation scenario. Interest rates, which are seen as a tool against inflation, may be raised after a (very) long period of almost being at zero. Bonds and interest rates are usually inversely correlated with each other, hence the falling bond prices. You can read my post here on how interest rates could affect asset classes.

 

Though the previous two paragraphs may contradict each other, it is not unusual. A lot of factors are at play and it is difficult to identify the actual root causes that move the economy and markets. It is akin to 100 people playing with a big activity ball: the ball is moving around randomly, with the participants not knowing who had given the biggest push to move at a given direction. The real reason(s) behind are typically revealed at hindsight, i.e., when everything is over and clearer, which by then it is a bit late on the investing side of things.

 

In the world of economics and markets, everything is interlinked with one another (see my Economic Machine analogy write-up here), and if one part is affected, the rest would be affected, too, with a range of extents.

 

So How Now?

 

The answer is simple and oft repeated: Having a diversified portfolio would provide some protection and returns to your invested capital in different economic and market situations, and also wherever they move to. Inflation? Commodities (especially gold and silver) can help out a bit. Equities continuing the bull run? We have some of it and in the meantime, we can go a bit more into bonds as they are cheaper now. Interest rates rising? We have cash at hand to gain some returns from it.

 

While diversification should be done first on the asset class level, you can diversify further down the line by regions/countries, sectors/industries and finally to individual companies/securities. Do remember that capital moves between places which either gives the better returns and/or the better safety haven, depending on the weather of the moment.

My Second Endowus CPF Portfolio

This is an affiliated post with Endowus. All views, opinions and research expressed herewith are solely mine. The intended audience of this post is for individuals who are below 55 years old. Disclaimer applies.

 

A while ago, I had talked about Endowus’ Fund Smart, where you can customize your own portfolio with their curated unit trust funds.

 

I had just created my second Endowus portfolio using SGD 10,000 (currently processing) from my CPF Ordinary Account (OA) funds, and here it is:

 

If you have noticed, the three mentioned funds are all equities, and you may wonder why this time I had chosen only from one asset class, since I am a believer of diversification. Well, back in May 2020 when I first introduced Endowus, a reader (thanks, Hello World!) gave me an idea of investing a portion of the CPF-OA with equities, while the remaining uninvested part would grow at CPF-OA’s 2.5%/3.5% returns per year.

 

I had contemplated in starting an experiment with allocating an initial SGD 10,000 from the uninvested part of the CPF-OA and make this a 50/50 equities/CPF-OA portfolio, and track its performance from there, thus creating some sort of a mini CPF-OA environment. However, it would be a bit tedious in maintaining and rebalancing it, especially with the actual calculation of the CPF interest. Therefore, this investment portion would form a sub-portfolio (along with my earlier Endowus one and vested individual shares/REITs) and form part of the overall CPF-OA universe.

 

Funds Rationale¹

 

These three funds combined would provide me ample geographical, sectoral and economic development stage diversification. Geographical wise, the United States took up about 33.7%, with China coming in second at around 13.0%. The United States and China were ranked first and second respectively in nominal GDP², a metric commonly used to measure economy size, and I foresee they will continue to hold sway over the global economy. Their combined percentage of 46.7% is enough to expose the portfolio to the two behemoths, yet there is still room enough for exposure to the other economies, like third largest Japan (5.48%) and other countries like India, Australia, etc.

 

The sectors and industries are distributed, too, with information technology at 22.25%, financials at 18.38%, healthcare at 8.60%, industrials at 7.53%, and so on. This broad approach has an advantage of lowering concentration risk on any one sector.

 

For economic development stage, as pointed out in the previous section, 50% and 25% of the portfolio is allocated to developed and emerging markets respectively, with some overlap into both from the FSSA fund. On added note, the inclusion of the FSSA Dividend Advantage Fund, besides the overlapping feature stated above, is also due to the fund’s regular distributions, and its selection of companies based on their potential dividend growth and long-term capital appreciation.

 

Happy Lunar New Year!

 

Past performances of the funds stated in this post do not guarantee future results.

 

Click on this link and get SGD 10,000 managed free for six months (SGD 20 equivalent).

 

Just for the month of February 2021, you can start investing in Endowus with a minimum investment amount of SGD 888. Click on this link to start! (Terms and conditions: #1 – You must be a new Endowus client; #2 – Create an Endowus account from now till 14 February 2021 using the link; #3 – Fund your account with SGD 888 before 28 February 2021).

 

1 – Information obtained from the funds’ respective fact sheets dated December 2020 (accessed 11 Feb 2021)

 

2 – Silver, Caleb. The Top 25 Economies in the World. Investopedia. 24 Dec 2020. https://www.investopedia.com/insights/worlds-top-economies/ (accessed 11 Feb 2021)

The Bedokian’s View Of The GameStop Phenomenon

What a week it has been.

For the past five trading days, the markets were dominated by just one counter that had by now became a buzzword. And within this short frame of time, a few results were seen: a hedge fund had to be bailed out, some traders (may) have become millionaires and even prompted a U.S. congressional query into the whole scheme of things.

 

And what is the underlying counter that created all these?

 

That’s right, it is GameStop (GME), a brick-and-mortar retail chain specializing in selling video games, game consoles and their accessories.

 

While I do not want to delve into the mechanics of whats and hows (e.g., short squeeze, gamma squeeze, etc.), since they were explained by a lot of sites and blogs recently, I would like to briefly focus on the whys, which are somehow related to one another, and my take on the whole thing.

 

Why #1: The Power Of Social Media

 

Influence by social media is nothing new. A number of people and groups are taking to social media platforms to spread and peddle their news, campaigns, causes, goods, services, hobbies, etc. Social media, with its ease of spreading the message to the masses, coupled with underlying and simmering issues and frustrations at hand, may easily create a change movement. These changes may be brought about by either through peaceful, violent or anything in between, means.

 

According to sources that I had read, the GME issue may have its origins on a social media platform Reddit, namely a subreddit forum called “r/wallstreetbets”. Like most social media, news spread fast and wide and before long, “r/wallstreetbets” membership had swelled to about 7.3 million members when I last saw it.

 

Why #2: Democratization Of The Markets

 

Granted that trading platforms had existed in the form of smartphone applications (or apps) for quite some time, the entrance of affordable brokerage services (e.g., low to zero commission, offer of fractional shares, etc.), reduced daily activities attributed to the COVID-19 and lower cost of borrowing (or margin) due to near zero interest rate had probably caused a huge interest in the stock markets.

 

Add in the power of social media ingredient in Why #1 to the whole recipe, this had created what we called “democratization of the markets” where the deemed “power” of the markets, once seen as the domain of institutional investors, is now “shared” with the ordinary folk on the streets. Imagine the abovementioned 7.3 million members, each with a trading account and executing in concert, is a force to be reckoned with, and we have not counted other iterations and/or clones of “r/wallstreetbets” which are springing up on other social media platforms.

 

Why #3: Us Versus Them

 

Again, based on what I had read, the GME issue had evolved into another cause, which to put it casually, the institutions versus the retailers. There were some posts and opinions that pointed to the hedge funds, who were blamed for allegedly causing the financial crisis back in 2008/2009. Others felt the markets were unfair as it tended to skew favourably to the large institutional investors rather than the small retail investors (hence the welcoming of the democratization described in Why #2). With these thoughts in their minds, some felt this was one way of getting back at them.

 

This point was further exacerbated with the decision to restrict or halt the trading of GME shares (and some others) by a number of brokerages on 28 Jan 2021, which fuelled further the feeling of biasness of the markets, though some brokerages explained that the restriction or halt was due to their required posting of additional collaterals with their respective securities clearing houses. Most brokerages, however, did lift the restriction or halt after one day.

 

The Bedokian’s Take

 

After seeing the events unfolding, the first question anyone would have asked oneself would be “why did I not go into GME?”. The second question would be “if I had known, I would have bought 1,000 shares back then and I would be semi-retired by now”. Last but not least, “will GME’s run continue?”

 

Frankly speaking, no one has the foresight to see it coming. Even if someone had seen it, some analysis and due diligence would have been done and the person’s “guesstimate” was accurate on this count. For GME’s case, the catalysts came in the form of new gaming consoles, namely the Playstation 5 and Xbox Series X, and an ex-CEO of an online pet supply store becoming a substantial shareholder. Even so, the price went up to about USD 18.xx on 31 Dec 2020. The later “discovery” of the number of GME’s shares being shorted more than its actual inventory had given some acute observers an opportunity. What happened next, as we know it, is history (last week).

 

The whole GME phenomenon led to some stating it as market manipulation, while some mirrored it to the Dutch tulip mania back in the 1630s. Shouting buy and sell calls over social media is not uncommon and they had been doing them for a long time, but this time the amount of concerted and unified effort, plus the massive numbers involved, made the big difference compared with the rest.

 

Now, as I had mentioned in Why #2, other platforms are trying to emulate “r/wallstreetbets”-like setups and calling on others to buy up other counters. However, putting into context of a mania in general, social media is but one of the means of transmitting information, albeit it is faster than word-of-mouth or print. As an investor, you must learn to filter out the noise while doing fundamental analysis, and this may assist you from being sucked into the mania.