Introducing : The Cow Report on Chicken Little and Perps

I do not need to introduce the Cow, who has kindly allowed me to publish one of his old pieces just as a pre-cursor to more Cow Reports to come.

The Cow is an eminent member of the Singapore market originating from the place where legends descend from (hint) and is now in his twilight years as an advisory head in a bank I hope to have an account with some day. He was a pioneer in many “alien” products in Singapore, then, including asset backed what ? stuff ??!! (John would dispute this).

This was written last week and I hope you will like it.

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“The sky is falling! The sky is falling!” screamed Chicken Little… “No”, said Buck (Chicken Little’s Dad)… “They are just Bonds”.

 

After the latest bout of buying frenzy, I think we don’t have to worry about the aliens but rather where is the exit door for bonds. Whilst all bonds are not created the same, there will be segments of them that will go horribly bad. Below are some examples:

 

 

 

Shimao is Chinese property developer – not the worst but neither exactly blue chip. As recently as 2010-2011, Shimao had to raise 7year debt at between 9.65-11.00%. Today, they have raised them at 6.625%.

 

 

In the meantime, strong credits like Prudential Plc issued new Perpetual bonds (no step up) at 5.25%. Prior to this, a similar bond actually exist – Prudential 6.5% Perp which has on average traded at 90c over the last few years (until recently), for a running yield of about 7.2-7.5%.

 

Now, looking at both examples, if sentiments were to simply revert to those of 2010-2011, the marked-to-market loss is approximately 20-25 points. And if the green shoots of US turns to green grass, forcing a USD withdrawal from the global system, the drop will easily exceed 30 points.

 

I’m afraid it will not be Chicken Little running around screaming – but many unsuspecting bond investors. “The sky is falling! The sky is falling!”   I just hope it will be none of mine. Have a great weekend.