Bonds In Conversation : When It Rains, It Floods

I have floods on my mind though I have not mustered the courage to step foot outside yet for the entire day.

Photo of flooding in the AYE gone viral

The 10Y US treasury note suffered a nasty tumble yesterday, led by the 2Y which rose 0.08%. And it does look like we are on track for 3% in the near near term.

EM is seeing a recovery of sorts, manifested in a rally in the Sensex. There is plenty of cheer in the streets into the Non Farm Payroll tonight.

Corporate fixed rate bonds are looking ugly on the week as a function of interest rates as well as credit spreads. The indian names in SGD finally gave up the ghost and corrected led by Exim Bank, Indian Oil, ICICI and even the closely guarded Tata sold off, albeit less proportionately.

Olam bonds wilted along with their stock price, the Olam Perp now under 80 cts again.

Moody’s downgraded sub debts of Australian, Korean, Malaysian, Singaporean and Hong Kong banks yesterday, citing bail in risks for bondholders. Singapore market reaction – sanguine.

Some information I gleaned from Hongkie Babe yesterday.

  • Clients meeting shown high level of cash – US 9%, Asia 4%
  • Clients continue to move up credit curve
  • Default risk in HY increased
  • Supply risk is heavy
  • No break down between Investment Grade and High Yield yet
  • New issue spreads widening
  • New issue window is closing in very fast
  • Only US and european names are able to print
  • Asia corporates will have a very difficult time raising cash
  • Market is shut for long duration and high yield names
  • The market will be heavy even without new issuances
  • It is all about FOMC tapering
  • She is looking for AUD to go 0.8
  • Social unstability is high in HK
  • Asian marco is turning from bad to worse (Morgan Stanley just put out a negative outlook for HK and lowered GDP forecasts for the next 3 years to 3%/2.7%/2.9% vs 10Y average of 4.5%)

When it rains, it floods. Things will get worse before turning better.

Citibank Fund Flow Picture

  • Inflows into global fixed income funds were off the charts during QE, raising risks of further large outflows to come.
  • Flows are away from fixed income and EM assets and into money market funds and European equities. These flows are likely to continue.
  • Short term stabilization possible, but in bigger picture re-pricing of EM rates not complete.

So there we go. I suggest avoiding the weaker names and possibly considering the government bonds at some time, including the US treasuries which have sold off because trading desks are selling everything they can get their hands on. Meanwhile, SGD corp prices are getting scarcer and scarcer, some issues are not even quoted as if banks who brought them out are hoping that they would just disappear.

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