Bonds In Conversation – Reconciling With Financial Repression
As my friend, Asianmacro put it, we are thriving on bad news and praying for external stimulus.
Bill Gross, “There Will Be Haircuts” May 2013
“The easiest answer to the question of what to buy is to simply take your ball and go home. If the rules aren’t fair, don’t play.”
“1) Central banks and policymakers are acting like barbers. They haircut your investments.
2) Negative real interest rates, inflation, currency devaluation, capital controls and outright default are the barber’s scissors.
3) Gradually reduce duration, risk positions and “carry” as the year proceeds.”
Apple launched a megasize record bond issue for USD 17 bio which was readily lapped up, paying 3.85% for 30 year money. I happen to think 3.85% is not bad for 30 year considering that Apple is just as good, if not better than the US government who is paying 2.83% for 30 year money.
With the May day holiday yesterday, we only had 1 issue in Singapore – Trikomsel, which was a huge success with orders exceeding SGD 1.5 bio from 60 accounts, for a SGD 115 mio issue size. Private banks took half the amount. Price at 100.80/101.00 today, it seems.
I want to take this opportunity to expound a little on the relative value nature of bond investment and suggest my friends take a more active management style in the current environment.
Almost every single bond has outperformed this year. Going through my list of 2012 issues, the only ones that are under water from 1 Jan 2013, would be the Swiber and Ezra perpetuals, and the long dated HDB’s and Keppel’s to very small degrees.
For the 2013 cohort of issues, the only glaring under performer is the Unicredit subordinated. The other 2 fledging ones would be the Ezra 5Y and the Tata Steel 10Y.
Congrats and well done ! Because, guess what ?
The government bonds have not performed that well. The 10Y – 30Y SGS are all up in yield year to date.
Bill Gross of Pimco, the world’s biggest bond fund is increasingly bitter yet he is not the only one. There is a growing mood of dissent and protest that is coming from the major influencers in the world, starting with the Pope and England’s Archbishop, to market legends like Bill Gross, and hedge funders like Apollo Management whose boss Leon Black is saying he is “selling everything that is not nailed down.”
“Call it financial repression, says Shane Shepherd, the head of fixed income research for Research Affiliates in Newport Beach, Calif. He defines this as government policies that create an environment of low or negative real interest rates with the unstated intention of generating cheap funding for government spending. …..”We should,” Shepherd wrote this week, “all be familiar with the effects of financial repression by now. If not, compare the declining amount of interest income coming out of your savings account to the rising costs you pay for groceries, gasoline, or (shield your eyes) college tuition.” ” Source : Bloomberg
Leaving you with the prices (ALL UNVERIFIED).
Apple will make even more money issuing debt. Why? For the accounting trained. It’s called tax shield. Interests on bonds are tax deductible. So Apple saves on tax paid, avoid repatriation taxes. Kudos to the IRA for coming up with such convoluted tax laws.
Meanwhile, Apple’s Treasury aka hedge fund invest the money into Fixed income! Yes, Apple is running an interest rate gap! Beautiful.
This probably help Apple’s enterprise value (maybe profits as well) since next quarter’s sales is likely to disappoint (explains the recent rally). Looks like iOS 7 will delay the launch of new devices.
This aside, as company’s refinance with low rates, it will help to prop up their income. In an environment where sales momentum are declining, you need to scrap the barrel….
It is not just Apple.
Slovenia just got cut to JUNK by Moody’s but the order book for their USD 3.5 bio bond yesterday was 16 bio. Their annual GDP is only 49 bio.
Best part is, after downgrade, the 10Y rallied to 102.50 today.
Just seen on the Business Times that SGX is considering placing seasoned Secondary Mkt bonds into primary market.
When confirmed, this should provided some unexpected nice windfall especially for holders of DBS 4.7% & Genting 5.125% OTC fixed income.
Going to be an expensive exercise because the only reason they did not do it in the first place was the time and price constraint. Public issues cost so much more because of the fees in lodging which makes the prices uncompetitive.
Yet it is funny that bonds, which are considered safer than stocks are not more widely available to the public at large.