Bonds In Conversation : Trick Or Treat Time

24/10/2014 by

Equities bounced back, Ebola forgotten, terror alerts dismissed and bond yields holding near their 1 year lows (except for Greece and Russia).

I find myself unable to stick to a firm view with the most important central bank absent from headlines, as the Fed readies for the rather important end-of-taper FOMC next Wednesday (Thurs morning 2 am Singapore time).

The market is of 2 minds and in a high strung mood with the investor Bull and the Bear Indices rising in synchrony which suggests we are heading on a collision course. https://tradehaven.net/market/equity-tuesday-when-the-bulls-and-bears-collide/

The bulls are winning as history has shown that the Fed is biased towards market stability even as US treasuries suggest the market is in recession. As Blackrock reasoned that it is time to buy because 1. valuations are not in bubble territory and 2. we are not on the verge or even close to a recession yet. http://www.blackrockblog.com/2014/10/15/beginning-bear-market/?sf32540797=1

Risks are emerging from all angles this week yet the markets are choosing to only see the tepid economic data that has emerged from US and Europe, along with a super earnings season for US companies, as the panacea for global ills.

Noticed a spate of shootings that makes me uncomfortable. https://tradehaven.net/market/better-start-thinking-about-the-risks-we-dont-think-about/

Problems in the BRICS except for India, whose fate depends on the pace of their economic overhaul.

China
“BEIJING—China’s growth will slow sharply during the coming decade to 3.9% as its productivity nose dives and the country’s leaders fail to push through tough measures to remake the economy” http://online.wsj.com/articles/china-growth-seen-slowing-sharply-over-decade-1413778141

Little came out by way of economic stimulus or commitment to, in the 4th Chinese Communist Party plenum.

Russia
“MOSCOW—The Russian ruble weakened to fresh all-time lows versus the euro-dollar basket in early trade on Thursday as oil prices again dipped lower.” http://online.wsj.com/articles/russias-ruble-weakens-to-all-time-low-1414047426

“the country’s credit rating was cut to the second-lowest investment grade by Moody’s Investors Service amid sanctions over Ukraine. ” http://www.bloomberg.com/news/2014-10-19/russia-rating-cut-by-moody-s-on-sluggish-economic-growth.html?hootPostID=4398dfe003b93f03e2d230433e5a6e55

South Africa
“Cape Town (AFP) – South Africa’s economy is at a “turning point” and the government must cap spending and raise taxes to tackle its soaring deficit in the face of stalling growth, the finance minister said Wednesday……
Presenting his first mid-term budget policy statement to parliament, Nene slashed this year’s growth forecast to 1.4 percent, from the 2.7 percent estimated in the February budget.” http://news.yahoo.com/africa-turning-point-says-minister-cutting-growth-view-130707267.html

Brazil
“Latin America’s largest economy contracted 0.6 percent in the second quarter, following a revised 0.2 drop in the first three months of the year. Economists surveyed Oct. 10 by the central bank forecast 2014 growth forecast of 0.28 percent, down from 2.5 percent last year. The International Monetary Fund on Oct. 7 cut its growth estimate for Brazil to 0.3 percent from 1.3 percent in July. ” http://www.bloomberg.com/news/2014-10-16/ibovespa-futures-fall-with-commodities-as-brazil-growth-slows.html

Another sign for me is that Warren Buffet did not having a good week after he sold off a “huge mistake” of an investment in Tesco. This is followed by poor results out of IBM and Coca Cola, his trump card investments. http://fortune.com/2014/10/21/warren-buffetts-having-a-rough-week-and-its-only-tuesday/?utm_content=buffer241ae&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

Retail space is not looking good as Sears prepares to close stores and lay off about 5,500 employees as Lloyds Banking will do the same for 9,000 jobs in a switch to digitization.

In bonds, I note the huge spike in volatility for high yields as the HYG ETF, close the week off its highs after a massive short squeeze rebound.

iShares iBoxx $ High Yield Corporate Bond ETF

Credit spreads have tightened back on the week as investors pour into the markets on the fear that they would miss the next bull run, quite ignoring the scathing reports on the paralysed state of the leveraged loans business. http://www.bloomberg.com/news/2014-10-21/loan-market-losing-on-all-fronts-as-clo-rule-change-looms.html?hootPostID=759e2cb6479e548cdba6123b47820d8e

To me, the key risk remains liquidity and this recent episode has only served as a timely warning that liquidity is in distress and investors had to resort to hedging for illiquid positions in instruments such as the Russell 2000 (for HY US names) and the AUD dollar (for EM fx risks) which are highly imperfect hedges that cause massive volatility when unwound.

I don’t think we have too little written about it, if only people would read. And here is another one from CNN on what keeps bond investors up at nights. http://money.cnn.com/2014/10/23/investing/bond-investors-worry/index.html?sr=twmoney102314bondawake1100story

The Singapore bond market is looking a tad peakish these days with some of the O&G and real estate names not finding much liquidity or market support. Indeed most of the new bond issues brought out in the past 3 months are seeing consistently sub-par bids despite lower interest rates, probably to discourage selling.

We head into month end, the FOMC and Halloween next week, along with a slew of economic data.

I will make up my mind then whether this week has been a trick or treat.

Staying nimble.

Leaving you with the indicative prices.

USD Asian Bonds (indicative prices)