Bonds In Conversation : Fed With A Heart For How Long ?

“America’s companies, from Apple Inc. (AAPL) to Verizon Communications Inc., are saving about $700 billion in interest payments with the Federal Reserve’s unprecedented stimulus.”

We have not counted what the rest of the world is saving too. Is that enough to save the day ?

Not really. Growth is still slowing in EM and there is little to cheer about in this round of relief rally to save profits for a decent 3Q closing.

FT : Fed inaction buys time, not cure, for Asia, 19 Sep

At some point, it will no longer be about QE but we have to start thinking about real growth and reform prospects but EM shrugs it all off to rally with a vengeance.

19-Sep 6-Sep
Asia Invt Grades 1.13-1.17% 1.48-1.50%
Korea 5y 0.62-0.66% 0.73-0.78%
China 5yr 0.70-0.74% 0.89-0.93%
Philippines  5yr 1.00-1.06% 1.30-1.40%
Thailand  5yr 1.05-1.11% 1.37-1.47%
Indonesia 5yr 1.90-2.15% 2.80-3.00%
Malaysia 5yr 1.00-1.08% 1.35-1.45%
Vietnam 5yr 2.25-2.50% 3.00-3.30%

The question to ask now is if not now, then when the taper ? There will only be more volatility ahead which will make it a very difficult investment environment because 1. Fed credibility has been lost (backing down after 3 warnings) and 2. market will be increasingly data dependent when looking for a new trend.

In Singapore, we are seeing a 3 month low in interest rates. SGD corporate bonds have mostly underperformed the govis this round with prices reacting less to the interest rate move. The exceptions would be the Indian names which were beaten down in the past month and came back strongly, in line with the rally in credit space for India. Not expecting much to have traded

This is to be expected with liquidity yet to return to the marketplace and banks still somewhat reluctant to bid. The new Oxley 4.75% 09/2015 paper sits unchanged today at 100 even as the newly auctioned 20Y SGS rallied over 2 cents today to a yield of 104.875 3.05% (auction at 3.40% at 99.639).

We should also expect issuance to pick up steam again to make up for lost time. Locally, as an example, we have the Suntec reit issue that has been on the back burner since early Aug when credit conditions deteriorated.

So let’s face it. Banks are not in a hurry to be buying anything till the next taper and we really should not be quibbling over our 2% for 1Y Guoco when we can make that in 1 day for stocks.

Indicative prices as follows.