Bonds In Conversation : To Separate The Sheep From The Goats

07/11/2014 by

I am taking the PM’s advice seriously – be paranoid.

“Prime Minister Lee Hsien Loong says Singaporeans need to be “paranoid” and “aware” that someone could take their lunch away.” http://www.channelnewsasia.com/news/singapore/pm-lee-talks-popular/1439990.html

No extra marks if you have been paranoid all your life though.

And “paranoid” is good for us because Singapore is the Happiest Country in Asia !

http://unsdsn.org/wp-content/uploads/2014/02/WorldHappinessReport2013_online.pdf

It has been surreal markets for the week, flitting from one theme to another and highly unsettled after the BoJ delivered their whopper of another “whatever it takes” announcement last Friday.

This was followed by a Democrat wash out in the US mid term elections that was not so much a swing vote for the Republicans but more of social dissent rearing its ugly head that the economy “favours the wealthy” which was promptly ratified by a new record high in the S&P 500. Of all ironies. http://www.slate.com/articles/news_and_politics/politics/2014/11/republican_party_wins_the_midterms_democrats_couldn_t_escape_president_obama.html?wpsrc=fol_tw

Markets chose to bet heavily on the fact that the last time both houses of government were Republican with a Democrat in the White House back in Nov 1995, it marked the start of the last USD secular bull market.

For Asians, we have Zerohedge reporting that Sumitomo viewed that “Republicans tend to be market friendly in their policies” as a good enough reason to pile in on the USD trade.

Then the ECB came out with guns blazing and another “whatever it takes” rhetoric which sent markets into a tailspin rally last night.

Whilst most action has been in the FX and commodity markets besides US equities which has executed a perfect V shaped recovery to break a new historic high of 2031, just like my hedge fund friend predicted a week ago, exactement ! https://tradehaven.net/market/hedge-fund-perspectives-a-very-happy-halloween/

S&P 500 showing 52 wk lows for stocks followed promptly with new record highs.

For FX has now become the official representation of market reaction, all else pretty much inconsequential just like the impotent RBA on Tuesday.

It has not been a happy picture for all asset classes with crude and gold breaking record lows against the USD, along with the rest of the commodities except for a handful like natural gas which saw a 15% spike.

There is a clear delineation in the “favoured” assets versus the “outcasts”.

1. Ugly gap down in the MSCI EM Fx Index weekly chart.

2. The US High Yield etf, HYG US, failing to close the week higher.

iShares iBoxx $ High Yield Corporate Bond ETF is an exchange-traded fund incorporated in the USA. The ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, high yield corporate bonds.

3. A localised and specific rally in the EUR bond markets where we had Apple managing a 8 year EUR paper at 1% coupon rate. This compares to weakness in sovereign yields around the world, with yields rising from Australia to Brazil.

4. A protracted rally in the DXY USD index sustained since June this year.

If I was paranoid, I would say we are seeing segregation taking place. The favoured class versus the undesirables. And it is not longer the case of a rising tide lifting all boats.

Like I said in my previous post on where to expect the pain in oil markets, now is the time to be discerning because the defaults and distress have not started yet. https://tradehaven.net/market/the-oil-story-continued-where-is-the-pain/

There is little doubt that we shall be seeing distress in the weeks and months ahead as a direct result of market action now. For we cannot have a taper, a meltdown in oil prices and heightened volatility without some side effects.

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Bond prices are getting sticky in the corporate world, liquidity is not fantastic especially for high yields and perps.

In Singapore, I feel that I should point out that our 6 month SOR fixing is at a 12 month high although the rest of the curve is relatively tame as it could be due to the USDSGD trading at a 2 year high of 1.295 level and closing in fast on the 1.30 mark.