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.
comments prompt a bond sell-off
Jonathan Fuerbringer NYT Thursday,
July 17, 2003
Greenspan, the chairman of the Federal Reserve, has helped convince
investors that the bond market rally is over.
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."
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 ~~~~~~~~~~~~~~~~~ ^
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.
headline and news …
MARKETS-Global bond sell-off moves to Asia; shares up
June 26, 11:13 pm ET
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.
markets rose, with electronics companies favoured in Japan and South
government bonds (JGBs) took a hammering as a rising share market
seemed to offer better returns.
in U.S. Treasuries overnight was also a strong incentive to sell debt
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.
cut interest rates by a modest quarter point on Wednesday. Many had
expected a half point cut.
10-year bond yields rose more than 10 basis points to exceed five
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.
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 ~~~~~~~~~~~~~~~~~ ^
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, ….
bond issue hits Euro stocks
July 8, 2003 Posted: 1757 GMT ( 1:57 AM HKT)
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.
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.
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.
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
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 ~~~~~~~~~~~~~~~~~ ^
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.
Straits Time, 15th July, 2003
Power to issue RM 1.3b bond today.
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
EPF!, our money, our contribution will be invested in bond by EPF
Telekom expected to lead RM
18b bond sales
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
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,
discuss further …
Anxiety of Average Investors
majority of investors have over years lost money, or a lot of money.
Stock market plunge, economic bubble burst, Asian economic crisis,
Enron, World.com 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.
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.
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!
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
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.
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!)
wounded investors once again channel their eroded capital back to bond
Motives and Agenda of
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.
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.
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
above conflicting news and views, I suggest the following key
questions for Keen investors with anxiety to think about.
you want to be a focused investor, or engaging someone to help you
to stay focused
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%
the answer is yes, then there is a set of disciplines to be followed
in deciding in bond investment or equity unit trust investment.
you have a firm outlook of the stock market, based on certain
theories or serious research work?
you do not have ones, either you get serious in studying or engage
someone to help you.
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
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.
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
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.
you observed or make research study about the behavior of bond
fund price daily variation?
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+ %.
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
you still want to be jittery every time you hear a headline news?