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Asian Fixed Income: Chinese Bonds Rose After China Rate Cut

Implementing Carbon-free Investment Mandates using Index Futures

Equity Markets May Be “Sassy”, But Bond Markets Are The “Cool” Kids On The Block…

China’s Currency Devaluation and Its Impact on the Indian Stock Markets

Investment-Grade Corporate Bonds, Smooth Sailing

Asian Fixed Income: Chinese Bonds Rose After China Rate Cut

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Michele Leung

Director, Fixed Income Indices

S&P Dow Jones Indices

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China announced another policy rate and RRR cut this week. The one-year deposit and lending rates were lowered by 25bps to 1.75% and 4.65%, while RRR is reduced by 50bps to 18%. These measures aim to offset increased capital outflow and stabilize the economy.

While investors should remain cautious with market volatilities, certain Chinese assets with strong fundamentals and attractive carry could be appealing. China is expected to grow in importance for global markets. As of August 27, the S&P China Bond Index has delivered a total return of 0.49% MTD and 4.46% YTD, while its yield-to-maturity stands at 3.59%.

Looking specifically at the corporate sector, the S&P China Corporate Bond Index delivered total return of 5.29% YTD as of the same date, consistently outperforming the S&P 500®Bond Index over the last two years, see exhibit 1. The S&P 500®Bond Index is designed to be a corporate-bond counterpart to the S&P 500, which is widely regarded as the best single gauge of large-cap U.S. equities.  In addition, the historical monthly returns of the S&P China Corporate Bond Index and S&P 500®Bond Index demonstrated a low correlation (0.2075) between the two markets, meaning Chinese corporate bonds could provide a good source of diversification to global investors, see exhibit 2.

The S&P China High Quality Corporate Bond 3-7 Year Index, an investible index tracks the performance of Chinese corporate bonds within three to seven year tenors and uses more stringent rating criteria, has outperformed its boarder benchmark and returned 5.70% YTD, as of August 27, 2015. The S&P China High Quality Corporate Bond 3-7 Year Index (USD) gained 2.31% in the same period, reflecting the currency performance.

The yield-to-maturity of the S&P China High Quality Corporate Bond 3-7 Year Index is 4.13%, compared with the yield-to-maturity of the S&P 500 Investment Grade Corporate Bond Index at 3.17%.

Exhibit 1: Total Returns of the indices

S&P 500 Bond Index S&P 500 Investment Grade Corporate Bond Index S&P China Corporate Bond Index S&P China High Quality Corporate Bond 3-7 Year Index
YTD -0.59% -0.64% 5.29% 5.70%
1-Year 1.40% 1.38% 9.56% 10.09%
2-Year 7.98% 7.83% 13.99% 14.00%

Source: S&P Dow Jones Indices.  Data as of August 27, 2015.  Table is provided for illustrative purposes.  Past performance is no guarantee of future results.

Exhibit 2: Correlation of the indices

S&P 500 Bond Index S&P 500 Investment Grade Corporate Bond Index S&P China Corporate Bond Index S&P China High Quality Corporate Bond 3-7 Year Index
S&P 500 Bond Index 1 0.9983 0.2075 0.1666
S&P 500 Investment Grade Corporate Bond Index 1 0.1860 0.1516
S&P China Corporate Bond Index 1 0.9491
S&P China High Quality Corporate Bond 3-7 Year Index 1

Source: S&P Dow Jones Indices.  Data as of August 27, 2015, based on the monthly returns from January 1, 2013.  Table is provided for illustrative purposes.  Past performance is no guarantee of future results.

 

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Implementing Carbon-free Investment Mandates using Index Futures

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Richard Co

Executive Director, Equity Products

CME Group

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Socially responsible investment mandates have gradually worked their way into the investment world. The most prominent example might be the divestiture of companies that are involved in the expansion of mankind’s carbon footprint, i.e. the Energy Sector. At the same time, there is often a need to use listed derivatives to achieve the investment outcome. Example might include the need to equitize cash in the portfolio or manage the inflow and outflow of cash effectively to avoid cash drag.  Luckily, this can be accomplished with index futures such as those listed for trading at CME Group.  For example, one can easily replicate the S&P 500 ex-Energy with just the E-mini S&P 500 futures and the E-mini S&P Energy Select Sector Futures.

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On August 12, 2014, the energy sector represented approximately 7.3% of the S&P 500 index. Thus, for a $100 million-portfolio, approximately $7.3 million is tied up in the energy sector that is slated for divestiture under the social mandate. Simply selling short the equivalence of $7.3 million worth of E-mini S&P Energy Select Sector Index futures, or any other derivatives replicating that sector, is not the answer. If that was the only action taken, the resulting investment portfolio would be under invested… indeed by the same $7.3 million.

Thus additional investment needs to be made to bring it back to full deployment. If we denote the weight of the energy sector as W, the correct “hedge ratio” should be:

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Summing the two quantities gives you the full portfolio value again. As we have mentioned, W’s value was 9% on November 20, 2014. For a portfolio value of $100 million, these two quantities are $107.9 million and -$7.9 million respectively. Therefore, to achieve the goal of removing energy sector exposure while remaining fully invested, one option is to buy an additional $7.9 million in S&P 500 and sell $7.9 million in Energy Sector exposure – a spread trade that can be done all with equity index futures!

And the performance, you ask? The result from futures replication is indistinguishable from the assembling of the S&P 500 ex-Energy portfolio. Of course, the replication of the performance may depend on factors impacting the index futures market and future investment result may depart from what is depicted here.

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There are some nuances in using the E-mini S&P 500 Energy Select Sector futures as the surrogate. For those interested, the nuances are explained in CME Group’s publication available here.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Equity Markets May Be “Sassy”, But Bond Markets Are The “Cool” Kids On The Block…

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Heather Mcardle

Director, Fixed Income Indices

S&P Dow Jones Indices

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Bond markets may not be the most “sassy” of all the asset classes, but they certainly are a lot “cooler” in light of the global equity sell-off of the last two days.   Bond markets are traditionally known to be less volatile than all of the financial asset classes.  Global stock markets are taking serious hits over concerns that China’s growth is significantly slowing, and the impact this has for the world economy.   Bonds on the other hand, have been relatively stable, and despite a Chinese Yuan devaluation earlier in the month, Chinese sovereign bonds haven’t moved much.

The China S&P China Sovereign Bond Index, an index to track the performance of local-currency denominated sovereign bonds from China, is currently yielding 3.19%, has had 1 year annual returns of 8.49%, and as of today, is trading at the exact same yield as of June 1, 2015.  (Chinese equity volatility began in early June).  Between June 1 and today, this index has yielded between 3.07% – 3.23%, a considerably tight range considering the uncertainty and volatility in the region.  In particular, on the two biggest equity sell-off days globally, this index reacted in a rather “cool” manner:  on Thursday, August 20th, the index yielded 3.21%, was unchanged on Friday, and then tightened to 3.19% as of Monday’s close.  That’s a 3bps change.  Even on the day of the Yuan devaluation, the index widened only 2bps in reaction.

What does this say about Chinese sovereign bond markets?  They have low correlation to the Chinese equity market.  They behave like most other AA rated bonds in terms of lower volatility and “flight to safety” behavior.  Chinese sovereign bonds also have relatively higher yields compared to other AA rated countries.

The S&P Germany Sovereign Bond Index, has reacted similarly over the last few days. The S&P Germany Sovereign Bond Index yielded .20% on Thursday August 20th, tightened only 1bp to .19% on Friday the 21st, and closed Monday at .21%.  Even the S&P Spain Sovereign Bond Index, an index with a higher risk profile than Germany, tightened 1bp from Thursday to Friday, to 1.20% and closed at 1.24% on Monday.  Despite risk profiles, the stability of these indices show the appeal of bond markets in times of global market turmoil.

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The posts on this blog are opinions, not advice. Please read our Disclaimers.

China’s Currency Devaluation and Its Impact on the Indian Stock Markets

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Alka Banerjee

Managing Director, Product Management

S&P Dow Jones Indices

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Monday’s stock market crash coming on the heels of the US market fall on Friday, August 22nd is creating jitters for investors around the world. However the signals have been around for some time, with many predicting for some time an end to the bull run that US market has enjoyed for the last 6 years leaving valuations at an all-time high and China’s own stock market run up of more than 150% in the last one year.

The devaluation of the Yuan was highly unexpected by market participants, and as a result, the market reaction was very strong and erratic.  Many are once again calling China a “currency manipulator” and fears are rampant that this is a sign of major weakness in the Chinese economy as the authorities are desperate to prop up exports. In the end the devaluation appears to have sent a signal that the Chinese economy is weaker than understood and if the idea was to prop up exports or stocks markets, it has done the opposite. Due to its linkage to the dollar, the Yuan has strengthened substantially over the past year – in relation to most global currencies including many of China’s most important Asian export markets such as Korea, Taiwan and Thailand.  This, along with domestic economic weakening, has created downward pressure on the Yuan relative to the dollar and the Chinese authorities have, in recent months, been actively propping up the currency to maintain stability versus the dollar. In this context, a 4% depreciation of the Yuan versus the dollar seems like a rather modest decline and the intervention may be better described as a minimal effort to stabilize exports as the Yuan remains relatively strong compared to other global currencies.

Chinese currency devaluation is also viewed by some as a desperate effort to shore up its declining stock market. China has the delicate task of managing a slowing economy, an exchange rate made vulnerable by this slowing growth, a depressed stock market and the temptation to keep exchange rates low. Whatever may be rationale for the currency devaluation, the world is extremely worried about a slowdown of the world’s second largest economy and the response has been seen in the global stock market meltdown starting in the US on August 22nd and continuing globally the following Monday.

Examining the direct impact of Chinese currency movements on the Indian economy and stock markets there are several strains immediately visible. A cheaper Yuan makes it even more difficult for Indian exports to compete with Chinese exports as in textiles and apparels. Slowing Chinese economy also means lower commodity prices globally which hurts Indian commodity producers though helps the overall inflation levels to come down. Though the S&P BSE SENSEX has remained relatively flat in the last three months, it succumbed to global fears over the weekend with the SENSEX down 8.5% accompanied by an accompanying sharp fall in the INR. The real impact can be witnessed in the USD version of the SENSEX. The S&P BSE Dollex 30 has fallen 11.9% in the wake of the RS.3 depreciation brought on by the stronger dollar. A weaker rupee reduces the amount FIIs reap on stock market returns giving them less reason to bring in inflows to the Indian market.

Global stock market volatility is expected to remain given the weak Chinese economy and the expectation of an interest rate rise in the US. India’s Reserve bank Governor has assured that they are well prepared to defend the rupee against a further fall with USD 354 billion chest and it is to be noted that the Rupee has not yet slid to its previous low of Rs. 68.80. Consumer price inflation is also under control at least in the immediate term though it remains to be seen if it can be sustained. No doubt falling commodity prices will help contain inflation.

Comparing Indian stock markets to other major emerging markets, the picture is a lot rosier. Looking at chart 3, we see that the Indian Rupee has been holding up better against the US dollar and its stock market performance has also been more stable. The Indian authorities have rushed in to calm fears. While the short term may remain volatile given global fears, in the long term the stronger fundamentals should help the Indian market.

  • India/China – 

performance

  • Select Asian countries ex-China – 

performance 2

Source: Currency quote sourced from Bloomberg; total returns indices in local currency sourced from S&P Dow Jones Indices, from Dec 31, 2014 up to Aug 24, 2015.

Currency code INR CNY USD KRW MYR TWD BRL
Currency description India Rupees Chinese Yuan United States Dollar Korean Won Malaysian Ringgit Taiwan Dollar Brazilian Real

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Investment-Grade Corporate Bonds, Smooth Sailing

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Kevin Horan

Director, Fixed Income Indices

S&P Dow Jones Indices

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There is an old weather-predicting proverb that goes “red skies at night sailors delight; red skies in the morning sailors take warning.”  Well, there has been a lot of red over the last two mornings, and it has not been in the hot August skies but more so in the global financial markets.  Oil prices, which had recovered from a bad 2014, moved up from the January 2015 support price of USD 50 to a recent high of USD 63 in May.  Since June 30, 2015, the price of oil has dropped from USD 60 to its current level of USD 39.  The drop in the price of oil, in addition to other commodities, has boosted fears of a slowing global economy.

On the back of these fears, safe-haven investments, like government securities, have increased in demand.  The yield-to-worst of the S&P/BGCantor Current 10 Year U.S. Treasury Index dropped 15 bps between Aug. 14-21, 2015, to 2.05% and is now even lower, at 2.03% as of Aug. 24, 2015.  The yield had been as high as 2.49% as recently as June 10, 2015.  The index had a total return of 1.53% for the month of August and 2.94% YTD as of Aug. 24, 2015.

Recent events have highlighted the importance of the credit quality of investment holdings.  The S&P 500® Bond Index is designed to be a corporate-bond counterpart to the S&P 500, which is widely regarded as the best single gauge of large-cap U.S. equities.  The bond index is a broad index that is designed to measure 430 of the 500 equity issuers who have issued debt, and it includes both investment- and high-rated securities.  The majority of the index is investment-grade bonds, with only 7.6% of the issuers rated high yield.  As of Aug. 24, 2015, the worst-performing sector for the month is energy.  Energy makes up 7% of the S&P 500 Investment Grade Corporate Bond Index and 10% of the S&P 500 High Yield Corporate Bond Index

As of Aug. 24, 2015, the overall bond index (S&P 500 Bond Index) has returned 0.39% for the month and 0.30% YTD, while the S&P 500 Investment Grade Corporate Bond Index has returned 0.58% month-to-date and 0.36% YTD, and the S&P 500 High Yield Corporate Bond Index has returned -1.88% for the month and -0.64% YTD.
S&P 500 Bond Index Total Returns

Source: S&P Dow Jones Indices LLC.  Data as of Aug. 24, 2015.  Table is provided for illustrative purposes.  Past performance is no guarantee of future results.

The posts on this blog are opinions, not advice. Please read our Disclaimers.