Bonds In Conversation : A Classic Conundrum And Unnoticed Trends

Mankind’s constant struggle with the environment transposed to markets and a conundrum – if the central banks keep saying things are so bad, then why are stock markets at record highs ?

Table : Dates of historic highs.

stock market highs

If German bund yields are negative to 3 years (and France has just followed suit), why has the US treasury curve not rallied in even the slightest tandem ?

Graph : German bund sovereign curve BUND CURVE

Daily developments make it difficult to discern a clear view of the future but there are some prevalent trends that investors have to be mindful of besides the  Big Fat Hairy ECB QE Surprise Windfall that intends to pump $1 trillion into the markets.

1. ECB Bank’s Stress Test Results due in October
Investors are keenly awaiting the results of the ECB’s unprecedented review, which will force lenders to come to terms with any lingering weaknesses, adjust capital buffers and write off soured loans to regain the trust of investors.

2. Liquidity Rules Coming to Wall Street
(Reuters) – U.S. regulators on Wednesday issued rules for banks to hold enough easy-to-sell assets to keep them afloat during a crunch, after many were caught short of cash during the 2007-09 financial crisis.

“(Reuters) – The world’s biggest banks may be able to count surplus capital toward new buffers of special bonds being imposed by regulators, two sources familiar with draft proposals said.

In order to secure a deal the regulators have agreed to a more flexible approach to cater for differences in banking models across the world, both sources said.”


3. Shrinking Budget Deficit in the US
“WASHINGTON—The U.S. government’s deficit over the next decade will be smaller than previously forecast, as a protracted period of low interest rates has slowed the increase of debt payments, the Congressional Budget Office said on Wednesday.”

4. Final taper in Oct will end QE 3.

All this says to me that there will be a need for more liquid assets on banking books will can only be fulfilled by sovereign bonds, of which there is insufficient supply of, in the case of the US, because the deficits are shrinking.

We shall and will have however, plentiful supply of other types of bonds, about 100 mio worth of tier 1 and 2 capital issues coming out of the US along with Chinese and European banks.

I see this as a boon rather than bane as it logically pre supposes that “too big to fail”, will be too big to fail eventually as new measures pound the companies (and their incomes) into safe havens, reserving my skepticism for another time.

EM sovereigns are issuing in force. Indonesia’s sukuk attracting a record sized order book. Portugal sells its biggest bond issue since 2008 for EUR 3.5 bio. And markets ignored Brazil’s slipping into a recession for the first time in over 5 years, to buy $1.05 bio worth of 11 year paper. We have Pakistan next despite its uncertain politics and the latest anti govt riots appearing pretty robust.

European issues for the 1st week of September has beaten the total for the month of August for plenty of supply if you are not fussy.


Political developments have been fast and furious with Ukraine looking good, Abe housekeeping his cabinet and Obama vowing to eradicate ISIS while Scotland is hanging in limbo for another week.

Ali Baba is launching 320.1 mio shares at $60-66 on 19 Sept, for the largest IPO in US history.

Meanwhile David Tepper is the latest to come out with the Armageddon for bond markets.

I am on his side on that one. Alibaba = minus 24 bio from stocks and bonds and into Alibaba bank account which will not be going into investments soon.


A short comment on the new China Taiping Life perpetual bond which got the private bank market’s attention last week.

Traders think it is a tad expensive given the lack of a step up after the 5 year call and prefer to view this issue as 10 year risk.


Back in Singapore, we had a quiet week. The market saw a large issue out of Jurong Shipyard, guaranteed by Sembcorp Marine, after a 7 year hiatus from the markets which resulted in a pretty tight coupon especially if we consider that Jurong Shipyard paid 2.82% for a 1 year bond back in 2007 and they are raising 7 year money at 2.85% now.

I think we should brace for higher rates and will be doing a piece on the taper and the effect on the SGD next week.

Till then, have a good weekend.

Indicative prices for USD bonds listed in SGX and HK


SGD 2014 Corp Bonds


SGD 2013 Issues