In this first part of the series about our bond recommendations, we provide what we think are the best bond picks given our view of how the market will move in the coming months.
In succeeding articles, our team will update you on how these bond picks have performed over time. Our team will also show how a similar investment in a 4- to 5-year ROP (a bond issued by the Republic of the Philippines) performed over the same period. It is our hope that these articles will show you how we can help generate value for your investment portfolio.
Of course, different clients will have different needs and requirements. As such, we have created two distinct baskets to cater to the different investment universe available to our QIB clients and our non-QIB clients.
For reference, a QIB, or Qualified Institutional Buyer, can more easily invest in the bond issuances of corporations both locally and abroad. Non-QIB clients are limited to the bonds of sovereign issuers and local banks.
Given our tactical bias for higher yields from our early themes for 2024, we chose five bonds that we think can weather the storm until we think it is time to lock in yields for longer.
Initial QIB Basket
For full disclosure, the following basket is meant for our QIB clients who have funds to deploy in bonds, and, like us, are looking for tactical exposures until it is clear that yields will definitely trade lower.
QIB Basket Breakdown
For our top picks for QIB clients, we focused on finding short-end bonds that offer good yields given the risk taken, i.e., good relative value.
We know our clients currently prefer bonds that yield near 5%, which is roughly where BBB-rated names trade. But among the bonds that trade at these BBB levels, some names are rated A or even AA! As such, we’ve included Korea Electric (rated AA due to government support) and Citibank (rated A+) in the basket.
Similarly, names that have potential for further ratings upgrade should be of good value. As such, we’ve included some Hyundai Motor bonds in the QIB basket.
Hyundai Motor recently received a credit rating upgrade from Moody’s, one of the top three credit rating agencies in the world, to A3 (From Baa3) with a stable outlook. S&P, another one of the top three credit rating agencies, had earlier changed its outlook for Hyundai Motor to positive, from stable, while affirming their BBB+ rating for the company.
Hyundai Motor’s strong performance in 2023 and potential to continue this strong performance in the coming years was cited as the main reason for the upgrades. These developments make it more likely that Fitch, the last of the top three credit rating agencies, and S&P will eventually upgrade Hyundai Motor to A- (from BBB+).
Lastly, the soft-landing narrative is also beneficial to names that will benefit more if rates stay higher for longer, such as banks. As such, we have included Bangkok Bank and State Bank of India in the QIB Basket.
Overall, our basket is well diversified geographically, with good potential for spread compression. We are confident that investments in these 2- to 5-year bonds will do better than a similar investment in a simple 4- to 5-year ROP at least for the next few months.
We will also be ready to switch to 5- to 10-year bonds should there be data that would signal further cooling down in the US economy, or an even more dovish shift in the US Fed’s rhetoric that would clear the path for the imminent rate cuts.
Initial nQIB Basket
The following basket is meant for our non-QIB clients, who, as mentioned earlier, have funds to deploy in bonds of sovereign issuers and local banks.
Non-QIB Basket Breakdown
For our top picks, since bonds of Philippine banks have been difficult to find given a lack of issuances in the past few years, our list only includes sovereign bonds.
Given our preference for shorter-tenor bonds, we included ROP 25 (Philippines) and INDON 4.55 28 (Indonesia). We like ROP 25 for its high coupon and we favor INDON 4.55 28 as we think that it is the best valued short-term INDON with volume.
In the 5-year sector, we picked the higher-yielding bonds such as OMAN 29 (Oman) and RDB 29 (retail dollar bond).
OMAN 29 is our pick among our non-investment grade sovereigns to help boost the overall yield of the basket. We continue to prefer Oman over Bahrain due to Oman’s positive momentum in its quest to gain back its investment grade (IG) rating.
RDB 29 is easily the highest yielding among the 5-year ROPs. We also note how RDB 29 is not as sensitive to yield movements compared to other ROPs, which will be beneficial for when yields go up in the near term. We chose to give the highest weight in our basket to RDB 29 because of this.
Lastly, we included KSA 34 (Kingdom of Saudi Arabia) for our duration exposure. Ever since KSA’s recent issuance, the new KSAs have been trading at higher yields than similar tenor ROPs and INDONs.
We think this was because of the huge volume they wanted to issue (a total of USD 12 billion). Still, KSA is rated A, higher than the BBB rating of ROP and INDON, and we think KSA’s yield should eventually tighten back to below ROPs and INDONs.
Overall, our non-QIB picks are also well diversified in terms of geography and tenor. We are confident these investments will do better than a similar investment in a simple 4- to 5-year ROP for the next few months.
For this non-QIB basket, we will also be ready to switch to 5- to 10-year bonds for the same reason stated above.
(Bookmark and visit Metrobank Wealth Insights at www.wealthinsights.ph daily for investment insights and ideas. If you are a Metrobank client, please get in touch with your relationship manager or investment specialist if you wish to act on our recommendations.)
MARK BENEDICT TAN, CFA, is AVP and Head of the Global Credits Trading Department under the Treasury Group of Metrobank. He and his team are in charge of servicing the investment requirements of clients for global credits, seeking to find value in the wide investment grade credits universe. In his spare time, he enjoys playing various sports such as basketball, football, and tennis.
