Bonds In Conversation : Tapering The Taper For Old Times Sake

12/07/2013 by

We are ending the week well with headlines suggesting the tapering of the Taper as the commonly accepted interpretation of the FOMC minutes last night.

All I know is that the taper is an inevitable and no matter what reports suggest and market reactions received.

Much confusion abound in the market as central banks each pursue their agenda i.e. monetary easing to ease the taper effect while Indonesia and Brazil hiked to combat the outflows. Even China appears to be backing off their tightening stance along with Bernanke.

So we witnessed a fierce bond rally today, along with equities and all the oversold asset classes such as gold.

Volatility is not good. Uncertainty is not good. The lesson to take away from all this is that there shall no be clear investment trend for bonds for those yearning for the good old days. Markets will spend the days ahead addressing the problems that the Fed has postponed.

The EM outflows have not abated although quantums are starting to slow. We will not see a resurgence until money goes back into the funds. Until then there is a ton of bonds waiting to find new homes. The EM investment theme will continue to fade.

Around the world, we have Italy downgraded as Greece escaped with new aid to tide through summer. The IMF downgraded its global outlook (except for UK and Japan) and warned of a protracted slowdown.

Indonesia sold USD 1 billion of bonds at its highest yield since 2010 (Bloomberg) and “Chinese real-estate corporate bond prices have fallen for eight straight weeks, stung by a one-two punch of investors fleeing emerging-market debt and worries over China’s real-estate market. The selloff is the worst since the peak of the global financial crisis.” (WSJ).

Singapore

SGD corporate bond prices have recovered some ground and personally I am skeptical that names like Wingtai 10Y 2022 (unrated and yielding 4.31%)can trade at such close proximity to investment grades and even outperform decent names like ABN 4.7 2022 (rated BBB caxllable in 10/2017 yielding 4.5%). Closer to home, we have Keppel Land 11/2024 (unrated) indicating 4.88%.

Unicredit SPA SGD (rated BBB/Baa3 callable 07/2018) suffered a massive 4 cent drop in price after the Italian downgrade. The price at 88/90 (8.48%/7.95%) has factored in more than the 5.3% premium that costs to protect against its subdebt default ie. including the 5Y SGD swap of 1.66%, the bond price should be closer to 7%.

It does not baffle me that retail buyers who are making up much of this corporate bond rally (because fund managers are still looking to sell) would prefer unrated higher risk local names that yield relative less. Looking at the Swiber and Ezra perps which have rallied in the past week, I guess not many people are thinking about their leverage ratios and near term funding requirements which I have pointed out in another post.

It does not matter so much if the bond defaults but what matters is that the buyer is adequately compensated for the risk they are taking.

I have said enough.

Leaving you with the prices (unverified, as usual) and a precautionary word of advice not to out do yourself in this relief rally and invest for the sake of investing.

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