Bonds In Conversation : To Blame and To Carry On

15/08/2014 by

Chirpy Friday opening after a massive rally this week for credits to bounce right back as German 10Y bunds rally under 1% in yield which should go into textbooks as prices hit 150 and buyers better re-read up on their convexity lessons.

Obama is smiling because his popularity has risen (+1% to 42%, according to Gallup), at last, when the first rockets were fired and is looking up as he continues to shell ’em in Iraq which means he should save the Israel situation for the next round.

This round of poor economic data has been dismissed largely on geopolitical uncertainty and Europe has escaped scrutiny as equities rallied on the excuse that central banks will continue with easy policies and have reason to introduce more stimulus like in the case of Japan.

Politicians are heaving a sigh of relief as their popularity rises on their stances against the bad guys, who are incidentally Muslims trying to kill each other.

Turmoil is a big distraction as France comes out to scrap their deficit goal after promising to heed targets in April.

It’s all about the blame and carrying on and we are lucky to weather and war to blame this entire year that has resulted in our current euphoric state.

On the investor front there does not appear strain as corporate margins hit a record high http://www.businessinsider.sg/profit-margins-expand-in-q2-2014-8/

Bonds rallied hard on the week and high yields saw pretty rebound from the small sell off last week to stick around its recent record highs.

Chart : Bloomberg Global High Yield Bond Index

Most of my trader friends are highly skeptical because just this time last week, there were no buyers and the HY bond fund outflow has been branded a 6 sigma event according to Goldman http://www.businessinsider.sg/high-yield-fund-outflows-a-6-sigma-event-2014-8/#.U-2RfmMvdX8.

Expectations and reality are highly different animals and expectations are only as good as they last. The trading view remains that high risk assets will suffer the biggest hit in any volatility shock which could be triggered anytime during this period of geopolitical violence (Iraq, Syria, Libya, Ukraine, Gaza) and pestilence (Africa).

Nerves should return next week as we head into the Jackson Hole summit (21-23 Aug) and FOMC minutes (21 Aug).

Credits

I missed little on the issuance front in my Arctic sojourn except to note that our favourite Olam issued a 5.5 year note for USD 300 mio with little trouble at 4.638%.

And on the SGD front, we had a benchmark issue out of Capitamalls (A2) at 3.48% for 10 years SGD 300 mio besides a few others which I suspect is more a demand issue than supply as we have Indofood Agri lining up investor meetings and Pacific Radiance establishing a 1 bio MTN programme.

Yes. Bring on the shipyards and keep them coming because property companies are as silent as lambs.

My opinion is that liquidity will increasingly become a hindrance going ahead and I will not be chasing yields and spreads at these levels. Afterall, as a Fed study says, Chasing returns could cost investors as much as 40 percent over seven years http://bit.ly/1lNkTa3.

Leaving you with the prices and a nice picture from the Arctic of what a deer caught in headlights would look like.