Bonds In Conversation : Shark Attack Victims Feel No Pain
They say that shark attack victims often feel no pain. (Source : National Geographic)
Caught in the middle of a corporate bond issuance frenzy, I think nobody is feeling any pain yet. Except for maybe the holders of the old NOL papers maturing in 2020 and 2021. I have been informed by a reliable source that Standard Chartered just sent out a scathing recommendation that echoes mine yesterday, which is to sell those issues to buy the new ones. If you missed the NOL new issue review click here.
We are in the middle of a 5 month long feeding frenzy now. Over SGD 16 billion worth of papers issued since 1 Jun 2012 with the SGD appreciating 6% against the USD during this time. If you are a private banking customer with USD base currency, you will see handsome gains in your portfolio compared to the Singaporean who saves in SGD.
Are you any smarter ? Perhaps. But perhaps not if you are the 78% retail demand who bought into the NOL SGD 300 million issue yesterday.
I spoke to an old friend recently, who works for the syndication department of a large SGD bank. She says that the market is really hot and since people want to buy, just give it them if they have the money to pay. It feels irresponsible but we are dealing with rich people here who have the minimum SGD 250k to spend so its does not feel criminal since they can afford it.
As I write, I see them reopening the Olam 10Y at 100.00. Wow, milk the market while its hot. And I bet this one will be 100% retail demand.
I am considered a sort of expert on the SGD corporate market but I really hate to spoil the party. Good luck on being shark bait. Just look at the list below. Nothing is really flying, even the Indian Oil and notice, Genting has stalled again.
I share the same views with you regarding the current bond market. However, I believe that many people buying these papers are only interested in the yield. Like I mentioned in my earlier post, folks are only keen in the rates. Doesn’t take a genius to know that these bonds are paying substantially more than than bank deposits.
The problem with this is that the retail buyers don’t understand interest rate risk at all. Why I make this statement? Someone asked me some months ago why didn’t Genting’s perpetual price increase when its share price increase? I believe there are many more people like him.
I am one of those who don’t understand interest risk at all. Can a kind soul please explain how this works?
2 risks – interest rate and credit risk.
Very easy. Interest rate up, bond price down. Credit risk down, bond price up.
Interest Risk works both way:
1) interest rate increase to 3% in 2013 : you will see 2012 bond prices fall due to reduced yield as the 2013 issued bonds would have higher yield
2) interest rate decrease to 0.1% in 2013 : of course the party continued and those who bought 2012 bonds would see a higher pricing as 2013 issued bonds yield would even be lower
So the million dollars question : which scenario will come first ? 1 or 2 ?? Honestly, no one can predict what will happen but history has shown us that whatever bubble will eventually burst ( property, oil, commodities )
Hoped that helps in layman terms cos I’m just a simple man trying to make ends meet….
Thanks everyone. Much clearer now!