Bonds In Conversation : This Time It’s Different
We all knew this week was going to be a hairy hair raising one, markets highly indecisive or rather, confused, by all the central bankers and their speeches that saw equities fall then rise then fall again.
This is what happens when you have been there, done that and are doing it again.
It is not the same.
This time is different. And it is not because I could not get that Nexcare reusable carbon filter mask at Guardian this morning (after re-reading Hotzone, it seems that healthy monkeys in the adjoining room caught the virus without contact ….) or the fact that this stock rallied about 100% in the past 3 days.
Lakeland Industries, Inc. manufactures and distributes disposable and reusable protective work clothing.
The Company’s products are used in the chemical, petrochemical, health care, automotive, glass, cement, asbestos/lead abatement, waste management, and other industries.
Not so lucky for Airlines, Hotels, Insurance though…
IMF is busy busy trying to cover their tracks in a wave of sweeping downgrades for the world (except US and UK – unchanged, Spain, Canada and Mexico – positive !). https://tradehaven.net/market/parselmouth-is-imf-saying-to-buy-gold/
Source : RBS
A perfect dog for Lagarde.
We had the great Non Farm Payrolls last Friday before the IMF move on Monday. Then FOMC minutes came to cast more confusion appearing more dovish than expected leading to the S&P 500 making a perfect backflip that lasted for just 1 day before reversing back yesterday the minute Draghi opened his mouth.
This reminds me of the time last year when the USDJPY (& Nikkei) crashed everytime the BoJ/Abe came out to talk.
An old chart from Oct 2013 – note that the BoJ meetings always led poor USDJPY lower (ie. bad news).
This time is different.
Our starting point now is at the Highs for equity markets, Lows for credit and junk bond spreads, crapping commodity markets which is bad for EM (except for Coffee +100% ytd and meats – cows and pigs) and ballooning central banks balance sheets (except for the ECB which will be buying their 1 trillion soon and the Fed will taper off by next month though I am not sure if they will reinvest coupons) which look pretty exhausted.
Animal Spirits are ruling the markets and will continue to as we wait as anxiously as first time mothers before birth ? https://tradehaven.net/market/fx/fx-thoughts-gold-bitcoins-and-the-mighty-dollar-animal-spirits-forever/
We are running ahead of ourselves because err, we are not in a recession yet, you know. It is just expectations of low inflation and low growth which has not happened and central bankers cannot do anything about things until they see some evidence which means we will be sitting on bated breaths for the time being.
I envisage the next thing to pop is credit and a liquidity crunch to come even as 10Y US treasuries are at their year low in yield at 2.31% (actually at levels not seen since Jun 2013). https://tradehaven.net/market/liquidity-crunch-time-for-your-bonds/
High yield credit spreads are at their 12 month wides.
MARKIT CDX HY INDEX
EM Credits are holding well which could be the last chance to bail as Citi notes that if the 1997 scenario of worsening commodities (and oil) and a strong USD plays out, EM bonds and FX would do poorly against the S&P although we need a crisis of sorts to trigger that event.
Markit EM CDS Index
I am not sure of America these days given that China has finally overtaken the US in GDP on purchasing power terms. http://ftalphaville.ft.com/2014/10/07/1998332/moneysupply-the-new-world-economy-in-four-charts/?ftcamp=published_links%2Frss%2Fhome_us%2Ffeed%2F%2Fproduct
And some the former basket-case countries are swimming in bond heaven even as African nations continue to print and UK starts marketing as the first western country for a CNH bond issue.
taken from http://www.zerohedge.com
Only 2 bankruptcies this week – Espirito Santo Financial Group and that Apple phone screen maker, GT Advanced Technology.
In Asia, we have market waiting on the flood of Cocos out of Chinese banks which are finally coming around. The first is from Bank of China which is suggesting 6.5-7% yield.
Bad news is that it “may push up high-yield borrowing costs in Asia as investors sell to make room in their portfolios for the deal….”, according to Morgan Stanley analysts.
Meanwhile Chaori Solar is giving investors 20 cts back ! So all is not lost. Their default proposal is to restructure the bonds from a dollar to 20 cts.
And back in Singapore, it has been deals galore with no less than 4 new bond issues in 1 day yesterday, setting a record for the year, I suspect.
Favoured by private banks are still high yielding familiar names with LEVERAGE.
A shocking discovery I made is that banking professionals (let’s say the RMs) err, use a strange method of evaluating bond value – Loan Leverage ratio. [MAS, are you reading this ? I know the FBI/NSA should be, at least ! – Call me, will be happy to run a course for you]
So we have Swissco, United Energy, SMRT, Chip Eng Seng and CDL. King Wan and LOYZ to follow.
Meanwhile rates have fallen quite a bit. The SGD interest rate curve has flattened with the 10Y back to its 12 month lows while the 5 years and below are holding tightly onto their gains.
That is a bad sign especially if you put it in context of this new flash today.
Singapore Condo Builders Brace as $19 Billion Due
“Singapore’s listed developers and real-estate investment trusts face their heaviest burden of near-term maturities on record just as home prices drop.
The 80 property companies on Singapore’s stock exchange reported a combined S$23.5 billion ($18.5 billion) of borrowings that have to be repaid within a year in their latest filings, Bloomberg-compiled data show. The looming debt wall comes as the vacancy rate for condominiums soared to the highest since 2006, pushing prices to the lowest in almost two years, according to data from the Urban Redevelopment Authority.” http://www.bloomberg.com/news/2014-10-09/singapore-condo-builders-brace-as-19-billion-due-asean-credit.html
Volatility will continue to prevail in such times as we head into next Tuesday with the MAS to release the Monetary Policy Statement along with Singapore’s 3Q14 GDP numbers where 1% QoQ and 2.7% YoY growth is expected.
I have to go get those masks and disinfectants and food now.
Have a nice weekend ahead.
USD Asian Bond Prices (Indicative)
2014 SGD Bonds
2013 SGD Bonds
“A shocking discovery I made is that banking professionals (let’s say the RMs) err, use a strange method of evaluating bond value – Loan Leverage ratio. [MAS, are you reading this ? I know the FBI/NSA should be, at least ! – Call me, will be happy to run a course for you]” ………….. You mean if the more selling bank is willing to lend you to buy the bond means the bond is safer? Safer for who? The bank or the investor? But it is willing buyer and willing seller, and with the policy maker “making the interest rate low” , it is a easy sell for the bank to tell the customer borrow from the bank 1%, leverage and buy bond say with coupon 4 to 6% range, their leveraged return will be very high. So it is the policy maker to judge if this is risky? And of course if they first must be aware first or at not prevent to be not aware…..
Now, what’re I am the bank chief, and if plan to increase the bank earning by “helping” the private investors and “their corporate clients” by issuing “bonds”……….. Using the following hypothetical example : ( is such plan right ethically? Lucky bonds has not reach the retail in a big way yet….)
Assume their listed coporate clients, let just say they are in construction and property business, with banking relationship and loans outstanding with them, and further assume that given the prospect of increase interest rate and the slowing property, and the loan quality and risk will increase for the bank, and the bank can easily convince these clients to issue bonds, “helping them to plan ahead and avoid liquidity crunch ” and of such value added service deserves good fees, and at the same time if successful the risk for teh bank will be reduced…. One arrow two birds….
Now they can try to go the private banking clients and tell these clients, look with the low interest rate and excess liquidity (I guess they can tell the clients; if they want, that this is not their making, it is the policy maker’s fault, the policy maker can tighten this if they want, so if at all, blame MAS and gov), their fund is eroded by inflation ( again this is outcome of policy), and hence by help these clients, thhey can “lend” them at 1-2% and “help” them to buy bonds yield “4-5%”, with good leveraged return. So teh investors should “borrow” as much as possible and “bumped up” to get allocation and since the demands is so great….. Now assume that if the bonds proceed is to pay off the bank loan that they provided, then their risk will be transformed to one big coporate client to many private investors ( even if their give 100% leverage for private clients to buy the bond), and teh risk is greatly reduced and transferred to the private investors. In addition, the interest they earn from the loan to private investors and the “murky” spread of secondary bond transactions, what better business to be in? One arrow, many birs not just two…. And if anything goes wrong, can play “blame the gov and policy maker game”…… It is their doing that result in such investment environment and the regulations that result in such transactions possible etc… Let them take the political hit….
1. Many people do not realise that the bank makes more profits lending you at 1% to buy a 7% bond than to buy the 7% bond themselves. It is to do with maximising capital returns. Because buying the 7% bond would probably use up 100% of the bond proceeds in terms of capital whereas lending to a private client would use only a tiny fraction of that especially when you already have collateral (your money) with the bank. Using the same leverage concept, it means they are getting a 1% return on say 10 dollars instead of 7% return on 100 dollars.
2. Bankers are right to assume that bonds are less risky because just a few years back, private bank clients have lost many a good class bungalow for their 5 mio bucks of equity accumulators.
Except this time round, it is hard to see how clients cannot lose when a credit crunch happens and the contagion effect on their portfolio holdings could also inflict severe losses.
3. Note that few of the lawsuits ever succeeded in the past because Singapore has a habit of sealing off the cases and usually settle out of court eg. Oei Hong Leong’s case etc. That is why next year’s “opt out” rule would be a good time for accredited investors to reflect and take stock.