Bonds In Conversation : All We Have Is Hope

Hope is a wonderful thing.

Because with Hope, we need no results and Hope carries us to tomorrow and the day after and there will be no day of reckoning as long as Hope exists.

That sums up this week in the markets – Hope.

They are battering the USDJPY after Japan painted a glowing picture that their economic targets are on track even though their policies have gotten them downgraded by Moody’s to a single A1 from Aa3.

Dec. 1 (Bloomberg) — Key drivers for downgrade incl. heightened uncertainty over achievability of fiscal deficit reduction goals,Moody’s says. Sees increased risk of rising JGB yields, reduced debt affordability over medium term.

Lucky for us, the only ones holding Japanese bonds are the Japanese who are not bankrupted by the USDJPY and the BoJ. The rest of the world is only concerned with USDJPY.

Corporate bankruptcies linked to the yen’s slide hit a new record in November, highlighting the strains on small and midsize companies as Prime Minister Shinzo Abe campaigns for re-election on his deflation-busting economic strategy.

Forty-two of the companies that failed in November cited the weakened currency as a contributing cause, bringing total bankruptcies associated with the yen so far this year to 301, almost triple that of the same period in 2013, according to a survey by Teikoku Databank Ltd.

Bond prices are setting new highs with 5Y JGBs next on the negative yield watch.

Another eminent economist,  Harvard’s Rogoff backs Kuroda on easing.

And we have the Fed cheering the ECB on.

Fed’s Fischer says government bond buys by ECB would have positive effects.

ECB who, unlike Japan, is saying that Europe is in the pits but they would rather wait another quarter before they decide to further stimulate the economies. For yes, Europe is not just all about Germany masking the problems with the rest, which are, incidentally, doing rather well.

Because Europe and Japan have this to hope for after 6 years of QE – 2.73 million US jobs created in the past 12 months.

Source : WSJ

Source : WSJ

Except that the BoJ and ECB are targeting inflation which means the easiest route would be inflate via currency deflation, a very tall order especially if we consider that oil prices are now back to Nov 1979 levels in real terms.

The most beautiful thing about the Non Farm Payrolls this week is that it shut every single strategist or journalist, who value their jobs, up and we are seeing a definite change in tones for 2015 which has, so far, evaded the million or trillion dollar question – will we see a sell off in bonds ?

Sovereign bond yields have fallen to a 12 month low this week even as JP Morgan expects that 40% of high-yield energy bonds could default if oil prices stay at US$ 65 per barrel.

The Bloomberg Global Developed Sovereign Bond Index is a rules-based market-value weighted index engineered to measure the fixed-rate local currency public obligations of developed countries. The index is USD based and contains issues from the U.S., Canada, Europe and Pacific Rim countries.

The Bloomberg Global Developed Sovereign Bond Index is a rules-based market-value weighted index engineered to measure the fixed-rate local currency public obligations of developed countries. The index is USD based and contains issues from the U.S., Canada, Europe and Pacific Rim countries.


It has been a record year for EM bond issuance led by China which had ICBC come up with this week’s biggest issue out of Asia for US 5.6 bio of Cocos at 6%, a number that is greatly dwarfed by the biggest bond deal in the world this year out of Medtronic (Moody’s A3,  outlook negative after issuance) for US 17 bio to fund their takeover of Covidien.


Source : Thomson Reuters


The global corporate bond supply also broke a new record, surpassing $4 trillion for the first time ever.

This definitely gives the Japanese and Europeans lots of things to do with their QE monies as US government debt reaches $ 18 trillion, increasing 70% since Obama became president.

Ethiopia (B1/B)  is a prime example of a recent beneficiary, raising $ 1 billion at 6.625% for 10 years this week – US investors bought 50%, UK 35% and Europe 14%. The offering was oversubscribed by 260% with 96% of the bonds going to fund managers despite a strange qualifier in their prospectus on war and famine !

Nigerian bonds are not doing too badly despite the recent surge of violence with a 150 people killed in a  Boko Haram attack this week. Yields have fallen back down to 5.72% (Nigeria 2023 USD paper), no matter oil prices and the importance of oil for their middle class which grew 600% and GDP at 7%.

It is the same for Kenya and the deadly Al Shabaab militant attacks this week which was no cause for concern as their USD 10 year bond price holds at 107.40 (5.85%). Neighbouring Somali just lost their prime minister too, besides suffering from endemic corruption.

Yet Africa is the new frontier investment destination as far as the investment world is concerned and money will continue to pour in  to make up for her major and minor faux pas.

Meanwhile in the UK, major developments in the form of loss carried forward by banks.

Dec. 3 (Bloomberg) — U.K. Chancellor George Osborne says he’s limiting the amount of profit in established banks that can be offset by losses carried forward to 50% and delaying relief on bad debts.

This saw bank stocks dip before rebounding when it was realised that banks such as Barclays only has GBP 500 mio in deferred tax assets for the UK.

Chart of Barclays 8.25% USD Coco.
barclays 8.25 coco

And the UK will be paying back all of her WWI debts (perpetual bonds), at last, which drove 30 year gilts to yield only 2.73%.

The big themes going into the FOMC on the 18th of December would be the USD and the 2Y Treasury which has abruptly broken through a the magical 0.60% resistance that has served us well since 2011.

2y ust

The short end is ugly business if you ask me which is the same for Singapore this week.

Singapore’s curve inverted in the short end where the 1 month funding rate shot above the 3 month as SIBOR broke 5 year highs. We shall be talking about that in a separate post.

No new public issues for 2 weeks now although the loans market is heating up which is not good news for bond holders because loans are quite covenant laden-ed affairs and possibly secured as well.

The secondary market remains quite tight and we are seeing selective bids only for deals arranged by their own banks as traders make the most of the situation with their “limited limits”.

If it is a sign of things to come, that the USDSGD has broken above 1.32 (, the interest in SGD and other local currency bonds will continue to wane in the face of a strong USD and G3 currencies will be dominating the bond scene going forward which does not give us a lot of Hope, does it ?

Leaving you with the prices (unverified).

USD Asian Bonds (note that prices were taken during Asian hours which does not reflect the sell off in US time zone)




SGD 2014 Corporate Bonds


SGD 2013 Corporate Bonds (unverified)