INVESTMENT IN BONDS........article contributed by Chan Cheh Shin

As promised, my friend Chan Cheh Shin has contributed another article. This time, it is with regard to the inverse relationship between policy/interest rate and bond price. In short, the gist of Chan’s message is: If you expect policy/interest rate to be lowered in the near future, perhaps it is right time to buy bonds now in anticipation of rise in prices.

Thanks to Chan for his enlightenment.

NOTE: The contents are based on personal opinions and researched findings of the contributor. The article should not be interpreted as incoming events guaranteed to take place. This blog serves as a forum for sharing. You are welcome to share your views too (in the comments column) regardless whether you concur or otherwise with the contents shared by the contributor.

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Interest rate direction for developed market…. Going up?

Of course not. Those who advocated quantitative easing (QE), lowering of short end policy rate and free money for banking institutions in US and EU would cause a runaway inflation and thus yield would shoot to the sky will be totally defeated. If money printing and ballooning deficit will cause hyperinflation, then Japan will already face that monster in the 1990’s.

However, money printing and lowering of short end policy rate in developing world do create runaway inflation. China is a very good example (so is Vietnam, so is India, so is Brazil….).

The chart below shows that China trumped US handsomely in pumping liquidity. 

 

This was the effect on China inflation: Property ran up (Oh yes, this would “create” positive GDP)

But as the global economic outlook gets gloomy and gloomier, the developing countries' central bankers are now trying the trick of cutting interest rate to spur growth. And that would lead to market investors to predict a rate cut in future through the bond market. Below is the Malaysia interest rate projection for 2012 (from the courtesy of Jimmy - source: a bank with operations in Malaysia):

Spot rate: 3%    Q1: 2.75%      Q2: 2.50%      Q3: 2.50%     Q4:  2.50%

In fact, Chile this week cut their rate from 5.25% to 5%. China is expected to lower the lending rate too.

All these spell well for one asset class : Bond. As interest rate moves lower, bond price increases. Investor enjoys both capital gain and constant coupon payment.

Wishing all friends and readers a vibrant Gong Xi Fa Cai in the vigorous lunar Year Of The Dragon.