International Bonds Weekly : Kangaroos and Panda Bears


China is probably the only place making sense as yields rose on the week after a GDP number that was above  expectations at 7.5%, beating the previous quarter’s growth rate of 7.4% yoy, the lowest number since 2009.

It was not a week without scandal as the markets face a second potential default out of China, this time from Huatong Road & Bridge Group on both the bond coupon and principal, which has strong business connections with the government.

The default may again be averted on a government bailout as I note in an email with just a headline without a cited source – Huatong says getting local government support to avoid landmark bond default.

At least their company chairman is around, perhaps under house arrest, and assisting “investigations”. Another company, owned by Hansen Hengfa Investment Co. Ltd has been in arrears on their coupon payments, their guarantor gone quiet and chairman missing.

To top it off, Jiangsu Hengshunda Bio-energy Co, hailing from Jiangsu Province, disclosed that due to financial stress, it may be unable to repay its collective note this month end. The note is guaranteed as well.

This does not help that China’s credit growth has gone into double digit as the country chose growth over reform that even the top China analyst from BofA has expressed heavy skepticism on the sustainability of the stock and bond markets.

I think China is the least of everyone’s worry, for the time being, with Israel invading Gaza behind our backs as we fret on the possibility of another cold war.

Citibank sees 3 key factors to ensure growth ahead.
1. Lower cost of capital, implying rate cuts, PBOC balance sheet expansion and re-leveraging at an acceptable pace
2. Soft landing in the property sector with investment growth slowing to 10%
3. Reforms to generate demand and efficiency, thus winning investor confidence

Onshore interest rates are higher on the week with the Finance ministry failing to sell all of the 26 bio 2 year notes on auction. Thus it would be a good time to buy into safe Tier 1 names in the SOEs (State Owned Enterprises), MNC’s and big banks, which explains China Unicom’s mammoth 3.8% (initial coupon 4%) CNH 2.5 bio 2 year issue (22% to private banks).

CNH Bonds listed in SGX and HK



The hunt for yield continues as Australian 3 year bonds are next to fall under the RBA cash rate of 2.5%.

The highlight of the week has been the RBA minutes in which the central bank continues to bleat limply that “the exchange rate remained high by historical standards, particularly given the declines in key commodity prices, and was therefore offering less assistance than it otherwise might in achieving balanced growth in the economy.

RBA is the central bank to ignore for their impotency in the face of global markets and the AUDUSD immediately recovered its loss.

Nonetheless, the probability of a rate cut in the next 12 months is highest since Sep last year and the country gears up for growth by repealing their controversial “carbon tax”, a move that has the support of a large portion of Australia’s business community, including the coal, natural gas, and airline industries who see it as an unfair tax burden on Australians especially when the rest of the world are not paying the same.

The removal of the tax is seen as dis-inflationary and has earned the cheer of bond investors as well although it should keep a cap on the irrepressible AUDUSD which looks to be  heading lower for RBA’s dreams to come true.

Bank of China Aviation, BBB rated,  launched a 6 year 5.375% AUD paper last week which rallied 1.5% after issuance at 99.60 (yield 5.4%). Similarly, I am told that the market is on a hunt for infra and muni-like issues like Perth Airport (Baa2/BBB)  7 years which has rallied over 6% to record price of 105.575 since issuance back in March at 98.873 (yield 5.7%).

And the Qantas (Ba2/BB+) I was talking about last month to some of you, 7 years at 7.5%, it is also higher at 101.50 (issued price 99.438).

I have not included these non kangaroo-qualifying issues in the list but will endeavour to do so by next week or when I return from my trip on 10 Aug.

aud bonds