Horror Halloween Part 2 – SGD Corporates Bonds : What Fund Managers Are Saying And A Bit On Retail Bonds

Two old friends whom I have grown up with, both running sizeable SGD bond portfolios in reputable asset management firms, over an honest drinks session which started with a discussion on the pros and cons of me consuming holy water from the Vatican, courtesy of one of them, vis a vis the proper method of  dispensation, which is to sprinkle and not drink.

Well, we finally got around to talking about SGD corporate bonds, our common ground and forte, and both them rivals chuckled to the point of chortling about how dysfunctional the market has become.

Their opinion is that 2014 will be the real big test. As far as they are concerned the SGD market has gotten from bad to worse.

Problems :
1. Banks are not interested in providing secondary market liquidity
2. Banks appear just interested in pushing out the primary deals for fee income
3. Bid offer spreads for the obscure names are virtually non existent
4. Bid offer spreads for regular names have become so wide that it is quite hard to trade

The outrageous and slightly controversial theory is that retail buyers are heavily discouraged from selling while prices are kept as stable as possible for cosmetic reasons and monthly statements.

In a situation where you can buy but cannot sell albeit at a heavy, heavy penalty, there is not impetus for them to keep anything but the safest and most liquid names in their books. No perps or sub debts and no penny-stock bonds. There is even a growing trend of buying USD bonds and swapping them into SGD to avoid the problem of secondary market liquidity onshore.

So why 2014 ?

Markets will revisit the same problems again soon. The EM liquidity addiction, the taper and the shutdown. If easy funding is not available to the investor class who are holding bonds on leverage, they will have to make adjustments. We assume that people buy bonds for keeps or for at least a year or two. The deluge of issues in 2012 cannot sit forgotten and buried forever and next year will be a big test if liquidity conditions tighten.

What about ETFs ?

The SGD bond ETF I noticed in the market is not exactly new but its just a re-formatting of the good old ABF (Asian Bond Fund) which was formerly a unit trust.

I have fond memories of that back in 2004 when it was launched and the hurdles of creating and reducing units at the cut off times because the stock and bond markets close at about the same time.

The ETF is a boring one that is ultra safe and thus, delivering low returns. It is not meant for the institutional or sophisticated clients because the market makers are probably not keen on larger volumes.

Still, it is a start.

In Reply To The Straits Times Forum On Retail Bonds

So if you ask me what I think of the letter in the Strait Times forum yesterday on the request to bring retail bonds back into the marketplace. The answer is pretty simple : Money No Enough.

Retail tranches do not usually amount to more than SGD 20-30 million for all the 10k’s.
Paper work would cost significantly more for the legal aspects of a retail issue. Time to lodge the paper work would also take 2-3 weeks more. Only the truly altruistic issuer would consider a retail bond but not before slashing the coupon rate to make economic sense – eg. SIA and Capitamall.

And do not forget the cannibalisation of business here. Why should a bank want to sell a retail bond for a pathetic fee or no fee when they can sell you a unit trust, insurance linked product, a shorter term enhanced deposit (so you have to keep rolling every few months for them to earn fees) and a host of other more profitable products ?

Wrote something about this last year. https://tradehaven.net/market/bonds/bond-revolution-in-singapore-lesson-4-retail-bonds-in-singapore/

Conclusion

It is apt that PM Lee gave the analogy of Singapore as Sampan Version 2.0 instead of cruise liner today.

Because that is where our market is.

Still evolving and still learning and still tripping up and still not what you think it is.

 

Happy Halloween !!

PS : To readers, Bonds In Conversation will be delayed till tomorrow because I am in the midst of an experimental pickling project – trying to pickle about 10 kg of buah bling bling.

Wish me luck !