Bond Outlook

Many reports declared that the global recession had likely bottomed out and analysts expected the global economy would be in the process of recovery.

However, it remains uncertain as to when and how fast the recovery will come, and how bond investors will adjust their portfolios in the current circumstances.

Looking back at the world economic structure, we can find some answers. The global economy has been relying too much on US consumption.

So, when a contraction hits the US economy, this severely affects not only the US but also the world's second-largest economy, Japan, and spreads all over the world.

Though huge countries such as China and India can offer some hope as they play a big role in the recovery scenario, their economies are still not large enough to drive global expenditure.

On top of this, inflation this year is expected to be low, and therefore it is difficult to push up interest rates at least within the next year.

For these reasons, it is too early to say that the global economy is in its final stages of contraction.

In an uncertain economic situation, investing in the bond market might be a good choice for investors.

The recent steepening of the yield curve, with a spread of 273 basis points between two and 10-year tenors, indicates that returns on medium and long-term bonds are attractive, as seen by four to seven-year bond yields at 2.35-3.32 per cent per annum.

Moreover, investing in private debentures is a good opportunity to maximise returns with low risk. The credit spreads of investmentgrade (BBB+) corporate bonds are around 250 basis points.

This additional risk might be worthwhile because overall debts of local companies are still low and some have not been affected by the economic contraction.