Bonds In Conversation : It’s All About Debt

The vision for the world is the “New Neutral” a.k.a. Secular Stagnation.

I envisage this as a time where there is more money than assets left to buy, companies are being privatised via M&A deals and new companies are being funded by venture capital seeded by savvy investors, leaving very little on the table for the retail investor by the time they IPO.

M&A deals and VCs are funded by leverage and debt, which are then sold as bonds to the retail investors.

The retail investor profile is typically the baby boomers and some Gen X-ers who are happy to maintain a steady stream of income which makes bonds the perfect asset.

It is true, the stock market is not the place to get rich these days (” In fact, you’re almost certainly buying an asset that has already made someone else rich well before you ever had the opportunity to own a claim on that asset’s cash flows.”)

Unless you are lucky to be holding on to the M&A deals which are up 79% in turnover this year (average premium of 25%), because the small caps are not exactly flying if you are following the Russell 2000 Small Caps Index which has corrected 10% since its high in Mar (and not the S&P 500).

And the retail investor is fueling the debt craze with their dollars, giving junk credits no reason to pay down their debt or an excuse to borrow more.

Warnings have come out of the central banks this week, BOE, Bundesbank, in the FOMC minutes and a rare warning out of MAS on foreign property buying, even as debt continues to be issued in leveraged buyouts and payment in kind instruments (paying off interest with more debt). There are cautions and warnings out of everywhere this week, on London real estate, Chinese real estate, on leveraged buyouts and junk etc which matters very little, in my opinion.

It is not hard to see that the only access would be bonds for the average person with money to spare, borrowed or owned which makes it easy to understand the urgency of some of my friends to jump onto the private investing bandwagon, a whole new jaw dropping world of deal making to me.

There is over US 1 trillion in central bank liquidity in the markets looking for a home. Equity markets are shrinking (buy backs and M&As) and the only asset class that is exploding is debt, such that Wall Street banks are betting on bonds for the future, which makes sense for an aging population, keen to fund someone else to profit for only a small teeny reward.

This is a new world and its all about debt for now.

In Singapore, we had 2 new issues out of HDB for a 5Y SGD paper and Midas for ahigh yield 6% 2.5 year paper. Besides that, markets are engrossed with the nationalisation of the bus service and rumours of the same with MRT.

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