Bonds In Conversation : Happy Utopia Born on the 4th of July
Amazing numbers from America to mark a happy 4th of July for the markets around world – stock markets, mostly.
The highly anticipated US Non Farm Payrolls last night smashed new lows in the unemployment rate at 6.1% which is the lowest since Aug 2008 (vs crisis high of 10% in Oct 2009). This time nearly every sector of the workforce registered strong employment gains, forcing the 10Y US treasury yield to back up to a new 2 month high of 2.6868% before closing at 2.64%.
It has been nothing but perfect for markets in the past week for records with nearly every single asset class closing mid year with a rally – stocks, bonds, commodities leaving investors with really nothing to complain about.
Major economies, including the question marks Japan and China, are turning around nicely and central banks remain committed to easing policies. Markets have realigned their correlation to central bank policies more than economic data.
This leaves the only risk left on the table, the risk of complacency.
For the higher yields, corporate bond prices are holding their own today with little evidence of correcting. A Bloomberg article noted that the only bonds that lost money this year are junk rated coal producers, but it remains to be seen if they will continue to underperform 😉 at this rate.
As far as I can see, there is nothing to detract the markets from their current utopia and I was wrong when I said last month, Yes, It Will Crash. By How Much ?
For wont for a healthy minor correction, the stage is setting up for a major one way down the road into the horizon.
Given the importance of the Fed and the FOMC, it is important to note Yellen’s views this week.
* she is against using interest rates to combat asset bubbles
* Fed does not see a systemic threat from the high yield loan market
* banks are now better equipped against losses
* banks have spread the risks into financial instruments that are distributed around the world
* the Fed is unable to detect the risks once they move outside the boundary of their supervision
* macroprudential policies should be adopted to curb financial excesses
In Singapore, we had a slow week with a new Singhaiyi 2.5 year note yielding 5.25%.
The economy continues on its restructuring course as the USDSGD set a new 2 month low and Singapore home prices post longest losing streak in 5 years.
Local SGD bond market news centred on a report of MAS discussions to bring more rated papers into the market and to improve market transparency. http://www.ifrasia.com/singapore-takes-aim-at-unrated-bonds/21153036.article
All taken positively by the market and even the new 15 year SGS has barely broke sweat after last night’s US treasury move, with its yield just a few pips higher.
It would also appear that we have a potential new DBS USD issue on its way…
Happy Utopia to all readers on the 4th of July !
SGD Bonds 2014 (prices unverified)