By Andrew Wong      18th July, 2003

Investors’ Anxiety & Confusion over News on Bond Sell Off

As this QuaSyLaTic investment advisor continues to advocate investing in (certain) bond fund at this moment in time, several QuaSyLaTic’s investors expressed concern and anxiety over the news on bond sell off. This article is written to explain the implication and the meaning of such happening. And more importantly, sharing my views to help investors make investment decisions.

We take a look at the news broadcast first.

Quote ~~~~~~~~~~~~~~~~~  ^

Greenspan's comments prompt a bond sell-off 

   Jonathan Fuerbringer NYT  Thursday, July 17, 2003

Alan Greenspan, the chairman of the Federal Reserve, has helped convince investors that the bond market rally is over.

The yield on the Treasury's 10-year note shot sharply higher on Tuesday after Greenspan told Congress that improved financial conditions, the abatement of uncertainties over the war in Iraq and the fiscal stimulus from the Bush tax cut "should bolster economic activity over coming quarters."

Those positive comments, which Greenspan largely repeated Wednesday in a second straight appearance before a U.S. congressional panel, were apparently enough to convince many more investors that a recovery is coming and, therefore, that they should get out of bonds before faster growth naturally pushes interest rates higher.

End Quote ~~~~~~~~~~~~~~~~~  ^

In another word, equity / stock market is becoming active again. Switch from bond to equity. Many fund managers / investors take the advice and sell bond, presumably invest in stock market. Hence bond sell off.

In another headline and news …

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ASIA MARKETS-Global bond sell-off moves to Asia; shares up

Thursday June 26, 11:13 pm ET

By Bradley Perrett

SINGAPORE, June 27 (Reuters) - A global sell-off of bonds spread to Asia on Friday in an extended response to what many investors saw as a half-hearted interest-rate cut by the U.S. central bank this week.

Share markets rose, with electronics companies favoured in Japan and South Korea.

Japanese government bonds (JGBs) took a hammering as a rising share market seemed to offer better returns.

A plunge in U.S. Treasuries overnight was also a strong incentive to sell debt in Asia.

U.S. Treasuries dived on Thursday as a massive corporate offering from General Motors Corp (NYSE:GM - News) tempted away investors still smarting from what they had seen as the Federal Reserve's disappointing easing of monetary policy.

The Fed cut interest rates by a modest quarter point on Wednesday. Many had expected a half point cut.

Australian 10-year bond yields rose more than 10 basis points to exceed five percent.

Japanese stocks posted handsome gains in morning trade, driving the benchmark Nikkei (^N225 - News) index up 1.12 percent to 9,022.99 points, as investors bought Canon Inc (Tokyo:7751.T - News) and other tech issues after their U.S. peers rose on renewed hopes for stronger growth in the world's biggest economy.

Computer and chip maker Fujitsu Ltd (Tokyo:6702.T - News) was up 3.0 percent and Tokyo Electron Ltd (Tokyo:8035.T - News), Japan's top chip gear maker, was 2.1 percent higher.

End Quote ~~~~~~~~~~~~~~~~~  ^

The above news carries the same message. Stock market is recovering. “Let get into the stock market bandwagon quickly to make big buck. Forget about the small and slow steady return from bond investment.”

Now we look at another set of news in the same month. News that is totally opposite to the above, ….

Quote ~~~~~~~~~~~~~~~~~  ^

German bond issue hits Euro stocks

Tuesday, July 8, 2003 Posted: 1757 GMT ( 1:57 AM HKT)

LONDON, England -- European stocks ended sluggishly Tuesday as a three percent fall by Deutsche Telekom after a huge bond issue exchangeable into its stock outweighed strong technology and insurance sectors.

Deutsche Telekom shares earlier fell as much as 4.68 percent after German state bank Kreditanstalt fuer Wiederaufbau (KfW) offered the world's biggest-ever convertible bond on Tuesday, seeking 4.5 billion euros.

Around Europe, shortly before the close at 1715 GMT the Frankfurt Xetra DAX was flat, 0.02 percent down at 3,332.16 points after earlier hitting fresh year-high of 3,363.43. The German index was weighed down by Deutsche Telekom's fall and a 0.77 percent weaker Deutsche Bank.

It was the same story in the other big European bourses. The CAC-40 in Paris closed down 0.13 percent at 3,177.97 and the Zurich SMI closed down 0.39 percent at 4,912.00. London's FTSE 100 ended up 0.03 percent at 4,073.60, weighed down by AstraZeneca.

JP Morgan Global Strategist Abhijit Chakrabortti told Reuters he was "overweight" on equities relative to bonds in a global portfolio, even though he believed absolute upside for equities was now limited.

BT Group lost 2.29 percent as investors sold the stock to invest in the Deutsche Telekom bond and as dealers said Cazenove cut its rating on the group to "long-term buy" from "buy."

End Quote ~~~~~~~~~~~~~~~~~  ^

The above is a totally opposite scenario. Little faith in the stock market, safest investment is still bond. “Wiederaufbau (KfW) offered the world's biggest-ever convertible bond on Tuesday, seeking 4.5 billion euros.”

We take a look at the local (Malaysian) news.

Quote ~~~~~~~~~~~~~~~~~  ^

New Straits Time, 15th July, 2003

YTL Power to issue RM 1.3b bond today.

Sources said the one-year tranche of the dept paper worth RM 400 million is believe to have been taken up by the Employee Provident Fund

 (Wow, EPF!, our money, our contribution will be invested in bond by EPF management!)

Telekom expected to lead RM 18b bond sales

Malaysian companies led by Telekom Malaysia Berhad plan to sell RM 18 billion of bond this quarter, making it the busiest period in four years for debt sales. Investors seeking higher yields will be eager to buy, fund managers and bond arrangers said.

End Quote ~~~~~~~~~~~~~~~~~  ^

There will be big big demand for bond. Industrialists who need money to operate, maintain and expand their businesses have no faith in the stock market to increase their share price for money, they have to source the much needed money from the fund managers by issuing bonds.

It is indeed confusing for the average investors on the street – with two totally opposite views of the investment climax within the same month July, 2003. Come next month, what will be the next headline news that may add further confusion and anxiety.

Observation of Human Behavior Pattern

A general observation of the above human behavior pattern points to the conclusion that we the human beings are really very reactive animals. Big players and small players alike. As average and small investors, should we react accordingly? How could we become more objective, focused investors?

We will discuss further …

Anxiety of Average Investors

A big majority of investors have over years lost money, or a lot of money. Stock market plunge, economic bubble burst, Asian economic crisis, Enron, collapse, … we had experienced enough. We see our investment capital eroding in shares, our future gloomy with diminishing value in mutual fund or unit trust, supposedly for long term investment. We are frightened. We can get very jittery and panic with news that imply anything that is negative.

Since the Asian economic crisis, few wounded investors managed to pull up their sleeves and invested in bond fund.- a fixed income type of fund, that generally gives regular and small return in the midst of the fluctuating, turbulent and uncertain stock market.

Now they are in disarray over the news like above -  Greenspan's comments prompt a bond sell-off. Likewise the new would-be bond investor also panic.

The anxiety stems from the early psychological wound from the fall of the stock market. They tend to imagine a similar happening of “plunge” “collapse” “bubble burst” in their bond fund investment!

However, with proper financial education on the differences of the two market instruments, bond and stock market / equity unit trust, investors can be more objective and less reactive.

A Scenario of Bond Mechanism

Assuming Greenspan is right about the market bull is coming back, the stock market rises, industrialists and business can source their much needed money from the rising shares price, corporations like YTL and Telekom etc may decide to cancel their bond issues. And if you invest in the bond fund of RM 1.00, they need to pay you back at least RM 1.00 as per contract, plus a bit of interest or penalty over the time span, even before maturity.

That is the nature of bond mechanism in a simplistic way. You get your money back in this scenario.

What if Greenspan is not correct about the return of the bull market? What if it still takes some years for the more sustaining bullish market to return? (After all he is also a human being, who can make mistakes. After all he did not predict and warn on the Asian Economic Crisis!)

Then the wounded investors once again channel their eroded capital back to bond again.

Motives and Agenda of Advocates

Many local fund managers also advocate investors to switch from bond to equity unit trust, especially lately when the market is surging. It is in a way a bond sell-off. As investors, we like to examine the motives and agenda of advocates.

For fund managers, there could be two mixed motives / agenda. One is that they genuinely believe stock market bull is coming back, hoping the investors can make good money. Another motives is that they can fetch more management fees if investors buy more equity unit trust.

What about Greenspan? Similarly he may have two mixed motives and agenda. First one is like the above, genuinely believe stock market bull is coming back. A second motive / agenda is to stir investors confidence to plough their money into the stock market, the economic growth engine. Even if the economic situation is not fully ready, when majority believe so, more money can be channeled to lubricate the market to start the not-so-ready engine!. (Of course, they are many others do not think alike, like above corporations issuing bonds)

What is the motive / Agenda of this QuaSyLaTic? Very simply, I am a serious investor, with large stake of my investment in bond currently. My objective is to ensure I have real positive return day by day, even small amount at a time, wait for another right time for bigger return.

Key Questions for Keen Investors

With the above conflicting news and views, I suggest the following key questions for Keen investors with anxiety to think about.

  1. Do you want to be a focused investor, or engaging someone to help you to stay focused

If the answer is no, then either you become casual investor, likely getting swayed by others’ reactive behavior, or just leave your money in the bank with 3% interest or EPF with 4.25%

If the answer is yes, then there is a set of disciplines to be followed in deciding in bond investment or equity unit trust investment.

  1. Do you have a firm outlook of the stock market, based on certain theories or serious research work?

If you do not have ones, either you get serious in studying or engage someone to help you.

If you have your own firm outlook, then test your theory and closely monitor the performance and behavior to check whether it is in line with your theories or assumptions. You need to protect your investment. Cut loss if necessary if you are wrong about the market behavior.

Once you have your firm outlook and model of the equity market behavior, then it becomes easier to make decision to invest in bond fund or equity unit trust.

If you believe that the economy is recovering and it is for a long bull run, as implied by Greenspan, then you still need to decide the timing to invest in equity unit trust. Do you want to be in such a big hurry to switch every cents from Bond to equity unit trust, like the big bond sell off is doing? By doing so, you are assuming the bond will plunge the next day to zero and the market will rise 300% in a day, hence must hurry hurry  and hurry!

If you believe that the fundamentals are still not there to sustain the market economy, then you should still stay in bond fund, and still closely monitor the performance to protect your investment, or engage someone to help you. At the same time look out for the best timing to enter the equity stock market.

  1. Have you observed or make research study about the behavior of bond fund price daily variation?

If you have, (I have 5-7 years of bond funds daily data, those fund I am investing and those others I monitor to make comparison), you will notice that the bond fund prices do not fluctuate like the stock market, the worse so far is return of 2-3%, the best 23+ %.

Guided by the past performance and continue to closely monitor the daily prices, won’t it be a more sure way to protect your investment with bond when there are still so many different views of the equity market behavior.

  1. Do you still want to be jittery every time you hear a headline news?



18th July, 2003.


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