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Top Three Questions About Japan’s Bond Market

Performance of Smart Beta Strategies Across Market and Economic Cycles

Make Room for a New Target Date Category

Oil’s Viscosity

Rieger Report: Factors impacting bond liquidity

Top Three Questions About Japan’s Bond Market

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Michele Leung

Former Director, Fixed Income Indices

S&P Dow Jones Indices

Question One: How big is Japan’s local currency bond market?  How does it compare to China’s bond market?

The size of the local currency bond market in Japan (tracked by the S&P Japan Bond Index) stood at JPY 1,154 trillion as of Jan. 27, 2016, which is equivalent to USD 9.7 trillion.  It is 1.7 times the size of the local currency bond market in China, as measured by the S&P China Bond Index.  Japanese sovereign bonds represent over 70% of market exposure; the current yield-to-maturity of the S&P Japan Sovereign Bond Index is 0.22%, compared with 2.83% for the S&P China Sovereign Bond Index.

Question Two: How did bonds perform in 2015?

The S&P Japan Bond Index gained 0.87% in 2015, benefiting from a rally in the last quarter (see Exhibit 1).  The index’s yield-to-maturity tightened by 15 bps to 0.24% in the same period.  In government bonds, the S&P Japan Sovereign Bond Index outperformed and increased 1.04%.  Within the corporate sectors, the S&P Japan Utilities Bond Index was up 0.95%, beating other sectors like financials, services, and industries.

Question Three: What about inflation-linked bonds?

Riding on weakening inflation expectations, the S&P Japan Sovereign Inflation-Linked Bond Index dropped 0.63% for the year.  The index’s yield-to-maturity has remained in negative territory since the second half of 2015 and stood at -1.15% as of Jan. 27, 2016.

The Bank of Japan (BoJ) announced on Jan 29 that it will apply a rate of negative 0.1% to excess reserves that financial institutional place at the bank, with the goal to push down borrowing costs to stimulate inflation. The BoJ aims to meet its 2% inflation target; reaching that target has been delayed due to weak consumer spending and the deflationary impact of the drop in oil prices.

Exhibit 1: Total Return Performance of the S&P Japan Bond Index

20160127

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

Performance of Smart Beta Strategies Across Market and Economic Cycles

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Priscilla Luk

Managing Director, Global Research & Design, APAC

S&P Dow Jones Indices

Historically, factor-based strategies have generated significant risk-adjusted returns in the long run, but they can also exhibit a high amount of cyclicality in the short run.  Based on our studies of factor performance under different financial regimes—the market cycle, the business cycle, and the investor sentiment regime—we found that factor strategies historically have been most responsive to market cycle analysis, while business cycle and investor sentiment analysis have served as good complements to market cycle analysis (see Exhibit 1).

Capture

Overall, value and high-dividend stocks generally produced the highest outperformance during both bull markets and market recovery periods.  However, they underperformed the market during the 1994-2000 market rally, partly because of their low exposure to information technology stocks.  On the other hand, growth stocks displayed strong performance after the market had bottomed out at the beginning of 2003, and their streak continued in the ensuing bull market—but they vastly lagged the S&P 500® in bear markets.

Quality stocks generally produced positive performance in rising markets, but their defensive characteristics came to the foreground in bearish markets and recovery periods.  Nevertheless, the defensiveness of quality stocks did not match that of low-volatility stocks, which beat the S&P 500 by the highest margin in falling markets.  Low volatility underperformed the most when the market rebounded from its troughs.

Conversely, momentum stocks delivered consistent and material excess return during bull markets, but they underperformed in recovery periods because of large price trend reversals.  Small-cap stocks outperformed the market in both bearish periods, and although they beat the market during recovery periods, they did not deliver consistent or significant excess return in bullish periods

In sum, factor strategies had distinct cyclicality and performed differently in various market and economic conditions.  Apart from strategic implementation to achieve targeted portfolio risk exposure, single-factor smart beta indices can also be implemented tactically to express macro-investment views.

For more information on how smart beta strategies performed in different financial regimes, download the research piece or watch our smart beta video series.

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

Make Room for a New Target Date Category

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Philip Murphy

Former Managing Director, Global Head of Index Governance

S&P Dow Jones Indices

Defined contribution (DC) plans, such as 401(k)s, place challenging demands on individuals, the highlights of which are to save diligently (which implies having adequate income, as well as budgeting abilities), to rationally select from among numerous investment vehicles, and to judiciously transition from wealth accumulation to income generation as retirement approaches. Innovations in plan design, such as auto enrollment and auto escalation, have helped with the first challenge. The introduction of target date funds, and other diversified investment alternatives, has helped with the second. But the retirement services industry and its clients—plan sponsors—continue to grapple with the last. The majority of 401(k) participants still do not have access to in-plan income solutions or, perhaps more importantly, to in-plan investments that integrate well with out-of-plan income solutions.

S&P DJI believes there is room in the target date industry for a new category, because it is possible to combine a glide path with a risk management framework, where the risk that one seeks to manage is the uncertainty of future income. Most people think of risk mitigation as managing the volatility of investment returns, or wealth level. However, investment drawdowns are not the only risk DC participants face as they seek to fund retirement consumption. A given amount of capital can fund some level of future income, but that level varies greatly, mainly as a function of prevailing interest rates, even though wealth may remain stable. In other words, a portfolio of T-Bills and high-quality, short-term bonds may provide stability of wealth, but may fail to provide stability of income purchasing power.

There are probably many plan participants and retirement savers for whom mitigating investment drawdowns, as retirement approaches, is an appropriate investment policy. However, there also may be many savers who have a need to integrate their investments with the funding of sustainable, inflation-adjusted future income. Often, this need goes unmet. With S&P DJI’s recent launch of the S&P Shift To Retirement Income and Decumulation (STRIDE) Indices, we hope to create a beachhead for new territory in the field of retirement investing. Nothing would please us more than to see popular fund rating shops like Morningstar and Lipper create a new target date fund category in the coming years that recognizes the risk management framework represented by the S&P STRIDE Index Series.

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

Oil’s Viscosity

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Kevin Horan

Former Director, Fixed Income Indices

S&P Dow Jones Indices

Oil’s Viscosity

It goes without saying that if your car’s engine (or any other combustible engine) does not have the lubrication effect of oil then the friction of movement will lead to overheating and engine damage.

Currently oil is having its own effect on markets as low prices are leading to concerns of lower future earnings.  The current price levels of commodities suggest a possible economic slowdown not just for the U.S. but on a global basis.  China’s lack of demand for commodities and the recent stimulation of its economy is just another move in the ongoing central bank action that includes Europe and Japan.   European Central Bank President Mario Draghi said at a Jan. 21, 2016, press conference that “falling oil prices and a slowdown in emerging markets warrant a review and possible recalibration of the ECB’s policy measures in about two months”, as summarized by MarketWatch[1].

The following points are in regard to these comments.

Exhibit 1: Performance of S&P 500 Sector Bond Indices
S&P 500 Bond Index Sector ReturnsSource: S&P Dow Jones Indices LLC.  Data as of Jan. 22, 2016.  Past performance is no guarantee of future results.  Table is provided for illustrative purposes.

 

[1]   http://www.marketwatch.com/story/4-key-takeaways-from-draghis-no-limits-statement-2016-01-21

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

Rieger Report: Factors impacting bond liquidity

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J.R. Rieger

Former Head of Fixed Income Indices

S&P Dow Jones Indices

Issuer name recognition and entity size seem to be factors in bond liquidity and as a result may be important considerations in index design.  Tracking the trade activity of corporate bonds issued by the ‘blue chip’ companies of the S&P 500 Index indicates liquidity is improved for these bonds over other bond issues.

Of course, when making decisions about depth of liquidity there are some important elements of the markets to consider:

  • There are many issuers of bonds and different types of issuers.
  • Some issuers borrow infrequently and others come to the bond markets with higher frequency.
  • Some issuers are well known entities to the investor community; others are smaller and less known.
  • Many  bonds can be issued from one entity, each with differing term structures (deal size, par amount, maturity, coupon, as well as redemption and security provisions to name a few).
  • Bonds are often buy and hold assets.
  • Bonds often represent long term obligations intentionally designed with maturities that match the useful life of the projects they fund.

Issuer name recognition and entity size as a factor can be illustrated by comparing the trade volume data of two indices: the S&P 500 Investment Grade Corporate Bond Index and the broader S&P U.S. Issued Investment Grade Corporate Bond Index.  Both have the same inclusion rules with the difference being the bonds in the S&P 500 Index must be bonds from the S&P 500 companies.

Table 1: Key index statistics as of December 2015:

Source: S&P Dow Jones Indices, LLC. Data as of December 31, 2015.
Source: S&P Dow Jones Indices, LLC. Data as of December 31, 2015.

What the data is telling us:

Table 2: Trade data statistics for June – December 2015

Source: S&P Dow Jones Indices, LLC and TRACE. Data as of December 31, 2015.
Source: S&P Dow Jones Indices, LLC and TRACE. Data as of December 31, 2015.

Please contact us to receive the time series referenced above.

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