Bonds In Conversation : A Disconnect

07/03/2013 by

Dollar Rocks With Stocks as Correlations Break Down: Currencies

March 7 (Bloomberg) — For the first time in four years the
dollar is participating in a rally that has sent stocks to
record highs as traders in the $4-trillion-a-day foreign-
exchange market bet the world’s largest economy will only
strengthen.

Central banks’ side-effects outperform the intended ones

March 7 (Financial Times) — Financial markets eye new
peaks, yet output is everywhere decelerating or shrinking.

There is a theme of disconnect in the marketplace that is sowing confusion in thinking minds, save for the robotic traders.

China property bonds have outperformed their equity bouncing back after a one day sell off to give the market assurance on the new 5Y USD VANKE issue to come. Bring it on suckers !

Local SGD China property names held up PCRT 6.375 09/2015 (unchanged) at 102.00 and CENCHI 10.75% 04/2016 at 110.39 (-0.50). Swiber and Ezra perps both unchanged as well at 93.00 and 97.60.

Headlines I see this morning.
* 940 am China Vanke Markets 5 Year Bond in Dollars at About T+220 bps
* 950 am Vanke, Poly, Gemdale Lead Decline in Chinese Property Shares

Point to note is that the recent big Bharti issue went to mostly fund managers just as the Vanke is expected to as well.

Singapore had a Wingtai Holdings 10Y which was decently oversubscribed for its 100 mio issue size and 4.25% yield.

Incidentally, Reuters reported that the spokesperson for Monte De Paschi was found dead, which does not bode too well for Italian banks if anybody cares.

Singapore corporate issuance has trickled to an almost standstill these days with the Mapletree Greater China Trust REIT taking centrestage in market action last week and trading up 10 cts today. Who would have thought that Reits will trade up with higher interest rates ?

I expect the retail trend will to continue to favour equity or perpetual issuances now that straight bonds are starting to sour. Issuers are leaping on the opportunity to pay low returns and lock in equity options at high strikes as the stock markets power away.

So what do I make of the Tiger Air announcement to raise $238 million for expansion when they only had a 3rd quarter profit of $2 million (and a loss of $17.4 mio the year earlier) ?

Tiger Airways to raise $238 million for Asian expansion
The budget carrier, partly owned by Singapore Airlines, plans to raise the
money through a rights issue and a preferential offering of perpetual
convertible bonds.
By Aiko Hayashi | 6 March 2013

By hitting hard on the disconnect right now and …. just like the recent JPM China equity report started out by saying, “The optimistic macro view on China sits at odds with increasing lack of enthusiasm amongst our sector teams……”

And I leave you, disconnected….

Singapore Government Bonds

2012 Benchmark Corporate Bonds

2013’s Issues & Olam Prices

		BID PRICE
WINGTAI	Mar-23	100.25
CITY DEVELOPMENT	Mar-18	100
RAFFLES EDUCATION	Feb-16	100.41
TATA COMMUNICATIONS	Feb-16	101.375
HDB	Jan-18	99.75
GOODPACK	Jan-23	99.75
MAYMK 1.35 01/28/14	Jan-14	100.08
HONGFOK	Jan-18	100.73
GUTHRIE	Jan-18	100.87
NUS	Jan-18	100
UNICREDIT	Jul-23	97.5
BIOSENSORS	Jan-17	101.2
FRASER CENTREPOINT	Jan-20	100
ICICI	Jan-20	100
HPL	Jan-18	100.4

		TODAY	LAST WK
OLAMSP 6 3/4 01/29/18	SGD	94.517	94.75
OLAMSP 6 10/25/22	SGD	90	92
OLAMSP 5 3/4 09/20/17	USD	93.75	93.8
OLAMSP 2 1/2 09/06/13	SGD	99.8	99.8
OLAMSP 5.8 07/17/19	SGD	93.85	94
OLAMSP 7 09/29/49	SGD	88	85
OLAMSP 6 08/10/18	SGD	96	92.5

Category : Market, Op-Eds

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14 thoughts on “Bonds In Conversation : A Disconnect”

Oldfolk on 07/03/2013 at 10:06 PM said:

Hi Sir, thank you for your updates and insights on various bond issues again. Btw are there any special reasons why Olam 2022 went down quite significantly over the last week while the other Olam bonds edged up or remained the same? Wondering if this is going to be a trend or probably it will rebound or stay there from here onwards, taking into consideration the various current factors. Look forward to your views. Thank you.

tradehaven on 08/03/2013 at 8:34 AM said:

Hi Oldfolk,

You are right. Looks much lower on inspection because I must have put the bid price for Olam 2022 instead of the mid price.
Bond prices have come off, especially those in the 10 year sector. It is the same of the government bonds and US treasuries.
If equities continue to outperform, interest rates will probably go higher. But in Olam’s case, it would also mean that their credit risk will reduce and the bond price could edge up.

Best of luck.
- Oldfolk on 09/03/2013 at 8:32 AM said:
  
  Thank you for your kind explanation. May I ask what would be your opinion on whether a bondholder of the 2022 paper should get out of this whole thing and sell it away now? If there’s little chance of it going back to par value in the near future (1-2yrs or less), there are quite a lot of other investments with less or similar risk that give 6% coupon or dividend or more.
  
  May I also ask, if there are no specific negative news on Olam, how likely is it the Olam bond will continue to go down further to mid 80s region?
  
  Thank you so much again
  - tradehaven on 09/03/2013 at 3:29 PM said:
    
    Hi Oldfolk,
    
    It is a function of higher interest rates which I have been writing about.
    Interest rates go up and fixed rate bonds suffer.
    Olam 2022’s price is affected by 2 factors. 1. interest rates 2. Olam’s credit quality
    If interest rates go up, then the bond price will fall. The longer the maturity, the worse it will be in this zero interest rate environment because the curve can only steepen.
    Factor 2 can save you if Olam suddenly becomes a blue chip overnight and mitigate the loss from Factor 1.
    I cannot give you the probability or likelihood of Olam going back down to the mid 80’again because I would be making a guess at best.
    If you had bought it with a 10 year time horizon, then you have another 9 1/2 years left for it to return 100 back to you (assume it does not default in between). You will still be earning your coupon till then.
    Personally, I would also weigh in the intangible factors like, if the investment is causing you distress and you are losing sleep over it.
    Think carefully of what you will substitute Olam with if you want to sell out. No point jumping out of the fire into the frying pan.
    
    Good luck.
- Oldfolk on 10/03/2013 at 8:10 AM said:
  
  Hi tradehaven, I deeply appreciated your explanation and highlighting the two factors which will determine Olam bond price again. As you have highlighted, interest rate is virtually zero now so it can only have negative effect on the bond price from now as interest rate goes up. I supposed the credit quality of Olam will never improve that much since it has so high gearing? So taking the present price of 90 as a reference price when there is zero interest rate and with the current credit quality of Olam it has now, we probably expect the bond price to go even lower in the near future if there isnt any radical improvement in Olam credit quality when interest rate goes up?
  
  Assuming Olam is “business as usual” for another year or two with no remarkable events occuring but interest rate slowly edge up,will we expect the Olam bond price to drop further from this level?
  
  If it is expected to be able to hold on to this price level for another 1.5yrs, then selling it away 1.5yrs later, the coupon received by that time can sort of cover the loss in capital though I still suffer huge losses due to inflation. (eg. Sell in 2014 April. Coupon received = 9%, so if I can sell it off at 91 in April 2014, I will mainly suffer inflationary loss).
  
  I wont mind holding it for ten years but I just wont feel too good holding on to a bond which has gone down so much and the price keeps going down. I am not too sure what I should substitute it with but I was thinking of substituting it with a basket of Preference share and bonds trading over the SGX market, perhaps including a bit of the Olam 6.75% USD bond? Mind to share your opinions on what options are available for me?
  
  Thank you so much again.
  - tradehaven on 10/03/2013 at 6:39 PM said:
    
    Dear Oldfolk,
    
    I hate to do this. But it is best you sort it out with your personal financial advisor.
    I dont know what is in your portfolio and what risk category you fall under.
    There are so many alternatives I can recommend but as to whether they fit you, I cannot advise further.
    Why don’t you get a list from your banker and we can help we work from there ?
    The world is really your oyster now.
    And its quite fun too.
- Oldfolk on 11/03/2013 at 3:53 AM said:
  
  Sure. Thanks for the advice. Will sort it out asap. Thanks again.
- Oldfolk on 13/03/2013 at 9:46 PM said:
  
  Hi tradehaven, really hope you can share your opinion on this. Most of the Olam issues, were pretty stable from the data I have in hand. Perhaps even inching up a bit. But Olam 6% 2022 has been conspiciously falling from 92 region to 88 region now in barely a fortnight or less.
  
  I understand 10 year bonds with longer tenor will perform less well. But even the Olam perpetual is virtually unaffected. I dont really see such “drastic” drop in other ten year bonds too.
  
  I am wondering if you can be kind enough to share your views on what you think would be the trend of this bond, just your personal views. Would you think it will fall further?
  
  Really most sincerely hope to be blessed with the insights of Tradehaven on this or any other Bond Guru who happen to see this message. Thank you so much in advance.
  - tradehaven on 13/03/2013 at 9:56 PM said:
    
    It’s gonna be a hit or miss here.
    Another 10 years of pain or a new future.
    My personal take for bond investors is pain before gain.
    But I could be wrong – SARS,tsunami etc.
    But who cares what it is for the world ? Care about what it will be for Yourself.
    What will you be ? Then work out your own answer from there.

Barnes on 08/03/2013 at 12:24 PM said:

Just a note olam 6.75% has been inching up. I like it because this can be executed through SGX so at least you can cash out easily.

Jim on 08/03/2013 at 2:56 PM said:

Hi tradehaven,

The below-mentioned should be in USD instead SGD, or is this a separate Olam 6.75% issue?
The prices quoted 94.517/94.75, is it the same issue traded on SGX but in this case they are just traded in OTC mkt.

In other words, this particular Olam 6.75% issue could be traded on both OTC & SGX at the same time.

TODAY LAST WK
OLAMSP 6 3/4 01/29/18 SGD 94.517 94.75

tradehaven on 08/03/2013 at 3:02 PM said:

Yes. Well spotted.
Error on my part, it is in USD. Haven’t been paying much attention to the Olam prices. Thanks for noting it !
And yes, OTC trading is done for this particular issue as well.
- Jim on 08/03/2013 at 4:36 PM said:
  
  Hi Tradehaven,
  
  Thanks for your clarification. Just thought it is great that one could sell small quantities in SGX & move large quantities in OTC trade.
  - tradehaven on 08/03/2013 at 8:48 PM said:
    
    Arbitrage opportunities aplenty if you have access to both sides.

Oldfolk on 07/03/2013 at 10:06 PM said:

Hi Sir, thank you for your updates and insights on various bond issues again. Btw are there any special reasons why Olam 2022 went down quite significantly over the last week while the other Olam bonds edged up or remained the same? Wondering if this is going to be a trend or probably it will rebound or stay there from here onwards, taking into consideration the various current factors. Look forward to your views. Thank you.
- tradehaven on 08/03/2013 at 8:34 AM said:
  
  Hi Oldfolk,
  
  You are right. Looks much lower on inspection because I must have put the bid price for Olam 2022 instead of the mid price.
  Bond prices have come off, especially those in the 10 year sector. It is the same of the government bonds and US treasuries.
  If equities continue to outperform, interest rates will probably go higher. But in Olam’s case, it would also mean that their credit risk will reduce and the bond price could edge up.
  
  Best of luck.
  - Oldfolk on 09/03/2013 at 8:32 AM said:
    
    Thank you for your kind explanation. May I ask what would be your opinion on whether a bondholder of the 2022 paper should get out of this whole thing and sell it away now? If there’s little chance of it going back to par value in the near future (1-2yrs or less), there are quite a lot of other investments with less or similar risk that give 6% coupon or dividend or more.
    
    May I also ask, if there are no specific negative news on Olam, how likely is it the Olam bond will continue to go down further to mid 80s region?
    
    Thank you so much again
    - tradehaven on 09/03/2013 at 3:29 PM said:
      
      Hi Oldfolk,
      
      It is a function of higher interest rates which I have been writing about.
      Interest rates go up and fixed rate bonds suffer.
      Olam 2022’s price is affected by 2 factors. 1. interest rates 2. Olam’s credit quality
      If interest rates go up, then the bond price will fall. The longer the maturity, the worse it will be in this zero interest rate environment because the curve can only steepen.
      Factor 2 can save you if Olam suddenly becomes a blue chip overnight and mitigate the loss from Factor 1.
      I cannot give you the probability or likelihood of Olam going back down to the mid 80’again because I would be making a guess at best.
      If you had bought it with a 10 year time horizon, then you have another 9 1/2 years left for it to return 100 back to you (assume it does not default in between). You will still be earning your coupon till then.
      Personally, I would also weigh in the intangible factors like, if the investment is causing you distress and you are losing sleep over it.
      Think carefully of what you will substitute Olam with if you want to sell out. No point jumping out of the fire into the frying pan.
      
      Good luck.
  - Oldfolk on 10/03/2013 at 8:10 AM said:
    
    Hi tradehaven, I deeply appreciated your explanation and highlighting the two factors which will determine Olam bond price again. As you have highlighted, interest rate is virtually zero now so it can only have negative effect on the bond price from now as interest rate goes up. I supposed the credit quality of Olam will never improve that much since it has so high gearing? So taking the present price of 90 as a reference price when there is zero interest rate and with the current credit quality of Olam it has now, we probably expect the bond price to go even lower in the near future if there isnt any radical improvement in Olam credit quality when interest rate goes up?
    
    Assuming Olam is “business as usual” for another year or two with no remarkable events occuring but interest rate slowly edge up,will we expect the Olam bond price to drop further from this level?
    
    If it is expected to be able to hold on to this price level for another 1.5yrs, then selling it away 1.5yrs later, the coupon received by that time can sort of cover the loss in capital though I still suffer huge losses due to inflation. (eg. Sell in 2014 April. Coupon received = 9%, so if I can sell it off at 91 in April 2014, I will mainly suffer inflationary loss).
    
    I wont mind holding it for ten years but I just wont feel too good holding on to a bond which has gone down so much and the price keeps going down. I am not too sure what I should substitute it with but I was thinking of substituting it with a basket of Preference share and bonds trading over the SGX market, perhaps including a bit of the Olam 6.75% USD bond? Mind to share your opinions on what options are available for me?
    
    Thank you so much again.
    - tradehaven on 10/03/2013 at 6:39 PM said:
      
      Dear Oldfolk,
      
      I hate to do this. But it is best you sort it out with your personal financial advisor.
      I dont know what is in your portfolio and what risk category you fall under.
      There are so many alternatives I can recommend but as to whether they fit you, I cannot advise further.
      Why don’t you get a list from your banker and we can help we work from there ?
      The world is really your oyster now.
      And its quite fun too.
  - Oldfolk on 11/03/2013 at 3:53 AM said:
    
    Sure. Thanks for the advice. Will sort it out asap. Thanks again.
  - Oldfolk on 13/03/2013 at 9:46 PM said:
    
    Hi tradehaven, really hope you can share your opinion on this. Most of the Olam issues, were pretty stable from the data I have in hand. Perhaps even inching up a bit. But Olam 6% 2022 has been conspiciously falling from 92 region to 88 region now in barely a fortnight or less.
    
    I understand 10 year bonds with longer tenor will perform less well. But even the Olam perpetual is virtually unaffected. I dont really see such “drastic” drop in other ten year bonds too.
    
    I am wondering if you can be kind enough to share your views on what you think would be the trend of this bond, just your personal views. Would you think it will fall further?
    
    Really most sincerely hope to be blessed with the insights of Tradehaven on this or any other Bond Guru who happen to see this message. Thank you so much in advance.
    - tradehaven on 13/03/2013 at 9:56 PM said:
      
      It’s gonna be a hit or miss here.
      Another 10 years of pain or a new future.
      My personal take for bond investors is pain before gain.
      But I could be wrong – SARS,tsunami etc.
      But who cares what it is for the world ? Care about what it will be for Yourself.
      What will you be ? Then work out your own answer from there.
Barnes on 08/03/2013 at 12:24 PM said:

Just a note olam 6.75% has been inching up. I like it because this can be executed through SGX so at least you can cash out easily.
Jim on 08/03/2013 at 2:56 PM said:

Hi tradehaven,

The below-mentioned should be in USD instead SGD, or is this a separate Olam 6.75% issue?
The prices quoted 94.517/94.75, is it the same issue traded on SGX but in this case they are just traded in OTC mkt.

In other words, this particular Olam 6.75% issue could be traded on both OTC & SGX at the same time.

TODAY LAST WK
OLAMSP 6 3/4 01/29/18 SGD 94.517 94.75
- tradehaven on 08/03/2013 at 3:02 PM said:
  
  Yes. Well spotted.
  Error on my part, it is in USD. Haven’t been paying much attention to the Olam prices. Thanks for noting it !
  And yes, OTC trading is done for this particular issue as well.
  - Jim on 08/03/2013 at 4:36 PM said:
    
    Hi Tradehaven,
    
    Thanks for your clarification. Just thought it is great that one could sell small quantities in SGX & move large quantities in OTC trade.
    - tradehaven on 08/03/2013 at 8:48 PM said:
      
      Arbitrage opportunities aplenty if you have access to both sides.

TradeHaven

Bonds In Conversation : A Disconnect

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14 thoughts on “Bonds In Conversation : A Disconnect”