Bonds In Conversation : Saving Is Good, Borrowing Is Bad

A mad week with markets suffering a huge loss of confidence in almost everything except the safest of stuff which is the irony because the less yield hungry you were, the more rewards you would be reaping now.

A friend who had bought the HDB 7 year bond back in March this year at the miserly yield of 3.008% ( I did like this one alot…. https://tradehaven.net/market/sgd-new-issue-urgent-review-hdb-7y-sgd-bond-3-008/) is now pocketing profits in selling the bond at near 103, which is about a full year worth of coupon on top of the 1.5% he collected for his accrued interest.

Massive change in volatility for all asset classes led by fx vols which exploded. Commodities, stocks, VIX, credits and govis all saw wild swings that the markets were unprepared for (else, we would not be seeing such moves).

Bad Volatility = Margin Calls = Contagion on the rest of the portfolio

Initial blame on Germany for not spending enough to spur the Eurozone economies and indeed, its been noted that 60.3% of German government bonds (including tbills) are now trading in the negative yield territory (unverified, Source : Bond Vigilantes). http://www.businesstimes.com.sg/government-economy/germany-stands-firm-on-austerity-as-it-cuts-growth-outlook

Then the blame swung to the Ebola scare as the outbreak appears to be spiraling out of control.

And the crashing oil prices, supposedly on the instigation of Saudi Arabia which has been deemed to threaten the existence of OPEC. http://blogs.ft.com/nick-butler/2014/10/16/has-saudi-arabia-lost-control-of-the-oil-market/

Observers note that 10Y US treasuries cannot be yielding 2% unless a recession is imminent and we cannot be farther away from that in the US as economic results continue to shine and initial jobless claims fall to a 14 year low. Or it could be the result of the drastic drop in the US Budget deficit to pre crisis levels. http://www.bloomberg.com/news/2014-10-15/u-s-budget-deficit-reaches-smallest-since-2007-on-revenue-jump.html?hootPostID=52648ee06c77dbc3e26c1a9db6f92fab

Cracks are showing up as Greek 10Y bonds broke 9% again, rising 2% within a week. Italy and Spain weakening out too.

My take on all this ?

Borrowing is bad ! Kudos to Germany for holding out.

Why borrow when it will come back to bite you one day ?

If we examine all the countries that are weathering the storm better than others – they are the non borrowers ! Look at Singapore ! Switzerland and gang.  None of borrowers, even though Australia is bit of an anomaly, running the least leveraged (DEBT/GDP) amongst the developed countries and suffering on the currency and stocks front, are suffering from any bad press in these times.

This holds true for companies and individual investors too as we await for casualties in the coming weeks. https://tradehaven.net/market/equity-thursday-watching-for-casualties/

So while people are sitting back and congratulating themselves on the fact that the bond index is beating the STI (for the second time this year), note that to monetise it, you should be selling now. http://www.businesstimes.com.sg/companies-markets/spore-bonds-finding-new-love-as-safe-haven-asset

But note again, that almost every bond is underperforming this week despite the massive drop in interest rates as credit spreads widened out.

With the exception of AAA credits like SMRT, stat boards like HDB, government linked names and of course, the government bonds, there are few names that closed the week higher in price.

Of the 2014 new issues, worst hit has been Yanlord which suffered huge negative contagion effect from the AGILE debacle. http://online.wsj.com/articles/agile-property-says-chairman-detained-by-chinese-prosecutors-1412993500

This is followed closely by the O&G names like Ezra, Swiber and gang whose stock prices have fallen sharply on the oil price move.

Perps have also seen some heavy selling eg. Genting which lost about 0.7cts, and I am pretty sure it is because of the poor liquidity due to the lack of banking lines to support the market. Banks only have limited ability to buy and if everyone sells all at once, the market freezes over.

It is a shame because interest rates did take a huge tumble this week, down 0.2% in the 5 years at one point, which is lower than what we opened the year at and it would have been opportune to beat the bond index by locking in the profits.

5 year SGD Interest Rate Swap

5 year SGD Interest Rate Swap

 

Because bond indices work this way – They only outperform if you lock it in.

The big theme going ahead is deflation which is not hard to envisage if oil prices remain where they are, wages remain low and credit does not grow.

 

China credit growth looking anemic.

Source : RBS

Source : RBS

Deflation in layman terms means a dollar today can buy more things tomorrow than it can today. And saving is good, something we are not used to after 6 years of “borrowing is good” propaganda with central banks leading by example.

The best example we have is America. The USD looking like a king now that they will be borrowing less, for the time being.

BUDGET DEFICIT

Source : Fix The Debt

 

Meanwhile, Asian credits had a nasty week only turning around today on short covering and fast money buying. I counted half the bonds in the red as lower tiered Chinese property names crapped out and we can blame Agile partly for that. The rest of the high yield papers weakened in line with the market panic.

It also really did not help that Bank of China came out with the first of a series of humongous issues we will be seeing from the Chinese banks in the coming weeks. USD 6.5 bio worth of RMB denominated bonds (at a fixed exchange rate) which confounded many buyers on their slightly complicated preference share structure. https://tradehaven.net/market/new-coco-issue-alert-bank-of-china-at1-preference-shares-usd-6-875-7/

Coco or not, it was still perceived as a much safer asset than the other stuff and many a portfolio liquidated holdings to make room for this one which probably accounted for some of the weakness in bond prices.

Other than that, we had Singapore’s monetary policy announcement. A non event that will keep the SGD strong we have had for the past 5 years.

It seems our only hope now lies in a non voting member of the FOMC, Bullard, who spoke last night about QE4 ? or extending the QE ? http://www.bloomberg.com/news/2014-10-16/bullard-challenges-fed-to-respond-to-weakening-inflation.html

When it boils down to such desperation, dead cats will bounce for sure, but it is still better to be saving.

Good luck !

USD Asian Bond Prices (indicative)
USD BONDS

USD BONDS 2

SGD 2014 Bond Prices (Indicative)
SGD 2014 CORPORATE BONDS
SGD 2013 Bond Prices (Indicative)
SGD 2013  NEW ISSUES