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The Fed and ECB Are Making Yield Plays In Fashion, Again

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Earlier this month, the US Federal Reserve came to a decision to maintain a larger balance sheet relative to the pre-2008 crisis period. This decision to end quantitative tightening came earlier after much internal deliberation.

Revising Balance Sheet Normalisation Principles

The Fed also announced the revision and replacement of its balance sheet normalisation principles. It will cease downsizing its balance sheet starting from October 2019. It will focus on holding treasury securities while its holdings of mortgage-backed securities gradually run-off to zero. Starting from October 2019, principal repayments received from mortgage-backed securities would be reinvested in treasury securities, subject to a maximum of US$20 billion per month.

The Fed Slamming Brakes On Interest Rate Hike

In addition, the Fed also slammed the brakes on US rate hikes in 2019 following observations of slower growth in household spending and fixed business investments in 1Q19. The Fed kept interest rate at 2.25-2.50 percent with projections of only one rate hike as late as 2020.

Looser Monetary Policy At ECB (In Conjunction With The Fed)

Besides the Fed, ECB policymakers have also unanimously acknowledged that growth momentum has weakened. As such, the ECB has launched a new series of targeted long-term refinancing operations to allow banks to borrow up to 30 percent of the stock of eligible loans.

Investors Takeaway: Investment Strategy – Yield Plays Are In Fashion

Yield Plays Stand To Benefit From Dovish Interest Rate Stance

According to UOBKH, the dovish disposition at both the Fed and the ECB will rekindle interest in yield plays. The abundance of liquidity make the recurring dividends offered by yield plays even more attractive. Based on the latest yield for 10-year Singapore government bonds, the yield spread between S-REITs and government bonds has widened despite recent rally in S-REIT share price.

Larger Margin Of Error With Yield Plays

According to UOBKH, yield plays typically hold up pretty well during market corrections with fluctuations in dividends being mild compared to volatility of share price. In addition, the ability to pay recurrent dividends is also a testimony to the strength of a company’s business franchise. Thus, UOBKH believes that yield plays are ideal to ride market volatilities.

Dividend Plays On STI

With STI being one of the powerhouse for dividend plays in the region, investors can find plenty of dividend treats listed on the STI. UOBKH points out a wide arrange of yield plays, ranging from aviation, banks, developers, REITS, telecommunications to transportation.

Aviation: SATS, ST Engineering

Banks: DBS, OCBC

Developers: CapitaLand, Ho Bee Land, PropNex

REITs: CapitaCommercial Trust, CDL Hospitality Trusts, Keppel REIT, Parkway Life REIT

Telecommunications: NetLink NBN Trust

Transportation: ComfortDelGro

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