Global high-yield bond funds are expected to face some downside risks in the second half of next year, following speculation that the US Federal Reserve’s may raise interest rates in the second quarter of next year at the earliest, CTBC Bank Co (中國信託商銀) said.
“Compared with other investment tools, the rate hike by the US central bank may raise more uncertainties over high-yield bond funds,” Tina Liao (廖亭亭), vice president of retail banking in Taiwan, told a press conference on Friday last week.
The Fed began a two-day policy meeting yesterday as the world’s No. 1 economy accelerates amid sluggish global growth.
At the meeting, Federal Open Market Committee (FOMC) officials might discuss whether to retain a pledge to keep borrowing costs low for a “considerable time,” Japan’s Nomura Holdings Inc said.
“The FOMC meeting is likely to provide the [US] dollar with some support,” Yujiro Goto, Nomura’s London-based currency strategist, told Bloomberg News. “The Fed may get rid of the ‘considerable time’ language, but may add that they will not raise rates as early as the first quarter.”
Other market watchers said that even if the Fed drops the “considerable time” phrase, it could be replaced by language saying that it will be “patient” in deciding when to raise rates.
In recent weeks, several Fed officials have used that word to describe how the monetary authority will proceed.
Most economists say the Fed will wait until June next year to raise short-term rates for the first time since it cut them to record lows in 2008 during the financial crisis.
Other economists think that as long as inflation stays below the Fed’s target rate of 2 percent, it could wait longer.
Since the Fed’s rate hike might fall in the second or third quarter next year, investors may have to start considering reducing holdings of high-yield bond funds, especially those issued in emerging markets, or junk or energy bonds, Liao said.
High-yield bond funds with a relatively long duration also pose a certain degree of risk, she added.
Taipei-based CTBC Bank, the banking arm of CTBC Financial Holding Co (中信金控), believes that overall trading momentum in the global financial market may be sufficiently strong next year, in view of continuous quantitative easing in Japan and Europe.
Abundant turnover in the financial sector generated by that momentum, coupled with mild growth in the global economy, could lead global equity markets to stay flat or post modest returns next year, with volatility brought up by the uncertainty over the Fed’s rate hikes, according to CTBC Bank.
In terms of foreign exchange rates, the bank forecast that the US dollar is likely to stay strong against other major global currencies next year, with the yuan likely to get the a chance to rise closer to a level of 6.05 against the greenback — which was the highest level the Chinese unit has reached so far this year.
Data show that the yuan has just barely posted an annual decline versus the US for two years in a row, the bank said, adding that the Chinese currency is expected to climb in the second half of next year after depreciating in the first half.
As for global crude oil prices — which dropped to multi-year lows in Asia recently — the imbalance between supply and demand may continue to negatively impact the commodity’s price outlook for next year, which CTBC Bank estimates will average between US$60 and US$70 per barrel.
Additional reporting by Bloomberg and AP
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