Return Of The Nightmare on Bond Street ?

I have to declare I have not read a single bullish piece out on bonds for a while.

There are reassuring pieces yet. Credit reports that serve to pacify, doing their best to allay fears of the Fed Taper. Yet most reports I read now veer towards caution as it would appear that credit experts are in a hurry to cover their asses without raising too much of an alarm.

Return of boom-era debt deals raise alarm : FT

“Global sales of commercial mortgage-backed securities are nearing $100bn, almost double last year’s total, according to Dealogic….Also making a comeback are collateralised debt obligations, which pool different corporate credits….reassurance that the vulnerabilities created by securitisation are not comparable with 2007 – it will not be the murderer or even provide the murder weapon. But the growth of securitised products may nevertheless be symptomatic of broader financial dangers.”

BIS Rings Alarm on Record Payment-in-Kind Junk Bond Sales

“Record sales of high-yield payment-in-kind bonds are triggering uneasiness among international regulators concerned investors may suffer losses when central banks tighten monetary policy.
Issuance of the notes, which give borrowers the option to repay interest with more debt, more than doubled this year to $16.5 billion from $6.5 billion in 2012, according to data compiled by Bloomberg.”

In the larger scheme of things, these are small distractions in the big picture. We saw the 2 largest bond issues on record this year, out of Verizon in a USD 49 bio 8 tranche issue and Apple Inc with USD 17 bio. Investment grade issuance in USD for 2013 totaled USD 1.127 trillion, exceeding 2012’s USD 1.122 trillion. High yield USD issuance also hit its highest ever at USD 1.493 trillion. Credit spreads are mostly at their lowest since 2007.

Globally, total corporate bond issuance is at about USD 3.7 trillion, down 8% from 2012.

Cracks are showing up though.

* Bond returns in Asia ex Japan are poised for their first annual loss in 5 years even as default rates for high yield Asian corporates end the year at 1.6%, down from a high of 14% in 2009.
* Chinese companies now represent the single largest geographical component of the Asia Credit Index at 25.8% according to Moody’s. * Onshore in China, First China Default Seen as Record $427 Billion Debt Due : Bloomberg

“A record 2.6 trillion yuan ($427 billion) of interest and principal on securities issued by non-financial companies must be repaid next year, 19 percent more than this year and the most since China International Capital Corp. began compiling the data in 2008….
The central bank warned on Nov. 5 the economy may see a decline in leverage over a long period, and said there are “prominent” problems in local government and property industry borrowings….
Following the Communist Party’s Nov. 9-12 plenum, China’s leaders pledged to allow market forces a “decisive” role in the allocation of resources.”

We hear a few squeaks from strategists in their interviews defending EM bonds and that they will see SUPPORT, yet none dare suggest a RALLY.

An old friend just shared with me this morning that he is holding on to a 7% return trust but sitting on 25% paper loss.

Singapore investors had a brief scare with Olam this time last year and I am pleased to congratulate everyone that Olam perp has rebounded to 87 cts or thereabouts (unverified). That is a neat climb from its 78 cts just 2 months back.

Olam is out of the woods now although I cannot speak for the rest. And since it is the season for sharing, I never liked CDOs and CPDOs but they saved my life(the bank’s books) back in 2008 because I saw them coming like a tsunami and decided to get out of everything as much as I could. Luckily, I had about 8 months headstart, but I felt slightly foolish in between too. It would be very entertaining to see how this record rally plays out next year especially with Basel 3 and Dodd Frank, the appetite for corporate bonds is only 1 sided or 2, if you want to count in the central banks (although I cannot see them stepping in to buy Oxley etc.).

SGX just launched a bond index today.


“Yesterday saw the launch of first ever SGD Fixed Income Index consisting
of government, statutory board and corporate bonds which represents 80% of
Singapore’s bullet bond index. There will be up to 60 sub-indices covering
various issuer type, maturity and risk profile & all constituents are
priced independently by Thomson Reuters. Aim of this index is to provide
market participants with a better view of the SGD bond market which is
still in its infancy stage but has seen tremendous growth over the past 2
years.” Source : bank trader
Good stuff. Can’t trade  it though because it is just practically impossible to execute.

Back to baking. Have a nice day.