Bonds In Conversation : Bond Tips For August (Updated)

01/08/2013 by

Great July for credits.

“Junk bonds globally have returned 2.33 percent in July, topping the 1.73 percent gain from investment-grade debt, according to Bloomberg index data.”

“Corporate bond returns have slowed this year after gaining about 54 percent in the four years ended in December as Bernanke rattled investors by telling Congress in May the central bank could reduce its $85 billion of monthly purchases if the U.S. labor market showed sustained improvement.
Bernanke helped calm investor concern this month by saying on July 17 that the central bank plans to maintain a “high degree” of monetary accommodation. The central bank has maintained a stimulus program that expanded its balance sheet by $2.6 trillion since September 2008.” Source : Bloomberg

I have been reading through some bond reports and there is starting to consensus AT LAST !

Interest rates are not going up any time soon even if the Fed starts Tapering because this is not a normal cyclical recovery which is accompanied by rate hikes and tighter credit conditions. This is a recovery from a crisis which slower paced.

From the bond curves, the market is expecting lower rates only for the next 2 years which is driving investors to short dated bonds which may not be the most optimal.
Morgan Stanley recommends 5 year as the duration sweet spot.
“….owning assets with slightly longer duration, around five years instead of two years or less, while actively managing duration risk, could provide superior diversification benefits. Buying spread products, such as high yield, with approximately five-year duration and a lower beta to interest rates therefore provides an attractive opportunity in the current environment.” taken from MS

Fixed-income investors see value in debt securities of companies with inflation under control and defaults still at about record lows. Investors put $4.36 billion into global bond funds in the week ended July 24, the most in nine weeks,
according to data compiled by market researcher EPFR Global.

Tapering will be balanced as the US deficit shrinks and the US Treasury dept issues less bonds.
“The White House is expecting the US budget deficit to shrink to $759bn, or 4.7 per cent of gross domestic product, during the 2013 fiscal year”
http://www.ft.com/cms/s/0/0f681f22-e80c-11e2-babb-00144feabdc0.html

Lastly, September will be a full month !

We have the US debt ceiling, the potential taper and the Fed chairman nomination coming up. In Europe, we will have the German elections that will be closely watched for the fate of the union.

Yet, for all that, this is not the time to buy complacently as we have in the past 4 glorious QE years. It is time to exercise caution into the specific names you want to put your money to work in.

Singapore

S&P’s announcement on Singapore banks.

” Standard & Poor’s Ratings Services issues a statement saying it has affirmed its counterparty credit ratings and ASEAN regional scale ratings on three Singapore banks: DBS Bank Ltd. (AA-/Stable/A-1+; axAAA/axA-1+)), United Overseas Bank Ltd. (AA-/Stable/A-1+; axAAA/axA-1+), and Oversea-Chinese Banking Corp. Ltd. (AA-/Stable/A-1+; axAAA/axA-1+). “The affirmations reflect our expectations that the banks’ strong financial profiles and prudent management strategies will provide buffers against any possible pressure on asset quality from high property prices and a potential turn in the interest-rate cycle,” said Standard & Poor’s credit analyst Ivan Tan. Move follows Moody’s decision earlier this month to lower its ratings on Singapore banks.” Source : Bloomberg.

On the Singapore front, we can expect issuance to pick up again. I foresee local bank perpetuals to come out as well as a potential Temasek deal which could have a SGD tranche.

Leaving you with the prices (unverified).