Bonds In Conversation : Fast Forward 2015, Says Markets

There are people who live in the past and there are those who live in the future. What is missing is the Present.

We hate the Present because it is not as good as the past and the future has the hope of being better.

Who doesn’t like the idea of being able to see the future ?

And the Fed Forward Guidance of this week’s FOMC has just done that. Portend to see the future for us by telling us what lies ahead.

But the truth of the matter is that we are not there yet and much of it depends on the NOW and that’s how stock markets did it. Rallied away to a new historic high because there is no rate hike yet nor envisaged for the next 6 months.

The USD busted its seams because there are rates hikes coming eventually but the fear of death remains largely contained in FX and bonds space.

It is ironic then that US household net worth rose to a record $81.5 trillion in the stock market and real estate euphoria yet the US Senate also held a hearing on the economic consequences of rising inequality at the same time.

I believe with Scotland and TLTRO and Alibaba all out of the way, we will be addressing the next big theme of Asset Bubbles next.

The IMF warns, “financial market indicators suggested investor bets funded with borrowed money looked “excessive” and that markets could quickly deflate if there were surprises in U.S. monetary policy or the conflicts in Ukraine and the Middle East.””

Central banks inflating ‘elevated’ asset prices: BIS
LONDON (Reuters) – Financial asset prices are at “elevated” levels and market volatility remains “exceptionally subdued” thanks to ultra-loose monetary policies being implemented by central banks around the world, the Bank for International Settlements said on Sunday.

Another interesting report out of Moody’s also warns of the impact of a 1% rate move which has not been factored into equity markets as yet.

“a 100-basis-point increase in 10-year Treasury rates, which is less than the spike that followed May 2013. The results: The gain would trim car and truck sales by an annual rate of almost 1 million by late 2015, hurting companies like Ford and GM. It would shave about 1.5 percentage points off the likely annual gain in housing prices. It would reduce housing starts by builders including D.R. Horton and Pulte  by an annual rate of about 70,000. And it would raise the unemployment rate by about 0.1 percentage point.”

These are the issues we are putting off until someone writes about them and the topic of conversations will start swinging as it gains traction to roil markets in the near term future.

My  favourite Jaws of Death chart of bond yields vs S&P 500 index is showing some signs of life with the 10Y yields (green line) ticking up, which makes the probability of a stock market(white line) correction higher.

jaws of death 2

Joining the “dots” of the FOMC dot charts, we have the Sept dots looking much fiercer and I personally think 3% for 10Y yields should be within reasonable expectations.  Afterall, the high for 2014 is 3.03%.

FOMC June Dots

FOMC June Dots


My next big worry would still be EM as the biggest losers from post Taper world would be the EM asset class.

Growth rates across the emerging world have slipped back toward those in advanced economies which makes the investment case uncompelling for these very economies that depend on FDIs to plug their deficits.

Going ahead, the risk would be for a IG-HY spread widening, differentiating between safe and unsafe names and I personally would not be in a hurry to chase those yields. Not especially when China’s PBOC cash injection is now being speculated as a short term operation to smooth liquidity ahead of the upcoming Golden week holiday on 1 – 7 Oct.

In Singapore, we saw some interesting deals this week Falcon Energy, Fraser Centrepoint and China Coal. These deals all suggest to me that the market has pent up demand on the retail front whilst institutions and banks were not too keen on a new HDB 5 year bond which saw a smallest issue size in over 15 months for SGD 500 mio.

Individual investors are probably unaware of the big moves happening in the interest rate space where 3 to 10 year interest rates have moved up 0.25 to 0.30% in the past month with the 5 year spiking up the most. The 5 year interest rate is at its 1 year highs and closing in on 2%.

My theory is that either people do not buy the higher dots story or they do not know about it yet or perhaps, they simply choose to live in the Present.

USD Asian Bonds listed in SGX and HK


2014 SGD Bonds


2013 SGD Bonds