Bonds In Conversation : Bond Market Winter

AAA bonds giving 25% returns ?

Yes. You got it. US 30 year treasuries would be a tough act to beat this year.
http://www.bloomberg.com/news/2014-12-11/u-s-30-year-bonds-head-for-best-year-since-2011-before-auction.html

Chart of my favourite TLT US ETF that is up 22.5% year to date, excluding dividends of about 3.1%, and now giving a yield of 2.76%.

iShares 20+ Year Treasury 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. Treasury bonds with remaining maturities greater than twenty years.

iShares 20+ Year Treasury 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. Treasury bonds with remaining maturities greater than twenty years.

 

US 10 year notes are still trading at their lowest yields for the year and it is the same for most of high grade Europe, including Turkey, and Asia except for the “troubled” states of Venezuela (23.9% 10y yield), Greece (8.74%) and Russia (12.8% ).

Japan has also run out of bonds to buy as RBS shutters their bond trading desk, eliminating about 200 staff to exit the JPY bond markets. http://www.bloomberg.com/news/2014-12-10/rbs-said-to-exit-japan-fixed-income-trading-as-it-cuts-200-jobs.html

It is more of a safety and supply situation that the markets have chose wisely to ignore the sterling economic numbers out of the US, unsure of the global situation with oil prices, not for the potential benefits but rather the fall outs and repercussions on countries and corporations.

Ukraine has declared herself almost bankrupt this week after her central bank’s governor resigned last week following the disappearance of a lot of Gold (about US 20 bio worth) since the government was overthrown earlier this year.

Thus they are asking for more IMF aid which is lucky for them and their USD Ukraine 7.5% 04/2023 is still trading at 68 cts to the dollar because Venezuela does not have that luxury and her bonds are going at 47 cts to the dollar.

Ukraine USD 7.5% 04/2023 bond price

Ukraine USD 7.5% 04/2023 bond price

Venezuela USD 12.75% 08/2022

Venezuela USD 12.75% 08/2022

 

For folks thinking that the problems will go away once oil breaks back up above US$ 70, the solution is not that simple.

Consider some of the issues I list below.

There are about 1,000 distressed bond issues with coupon payments due in the next few months. This does not take into account loans and other debts.

Half of them (581 securities) are US listed but we do have 3 bonds listed in Singapore – Bumi Capital USD 12% 11/2016, Bumi Investment USD 10.75% 10/2017 and Berau Capital USD 12.5% 07/2015.

In terms of losses, the Bloomberg High Yield Energy Bond Index is still holding above mid 2012 levels even as oil prices are heading to 5 year lows.

The Bloomberg USD High Yield Corporate Bond Index is a rules-based, market-value weighted index engineered to measure publicly issued non-investment grade USD fixed-rate, taxable, corporate bonds. To be included in the index a security must have a minimum par amount of 250MM.

The Bloomberg USD High Yield Corporate Bond Index is a rules-based, market-value weighted index engineered to measure publicly issued non-investment grade USD fixed-rate, taxable, corporate bonds. To be included in the index a security must have a minimum par amount of 250MM.

 

My main peeve with the markets is that the constantly changing rules are aimed at protecting banks and not retail investors.

Such as the big news out of China this week.

“China Securities Regulatory Commission said Monday that bonds rated below AAA and sold by issuers rated under AA will no longer be allowed to be used as collateral in repo trading in the stock exchanges.
New ruling is taking effect some time in January.”

This has left many an investor of LGFV (local govt funding vehicles) in doubt and caused prices to stagnate.

The Basel 3 and Dodd Frank rulings have already limited banks appetite for junk bonds which is a lucky thing for us because the absence of market liquidity also means that selling is disabled in periods of distress and will not unduly affect prices in a big way.

Thus, we can still have bonds in Singapore like Vallianz 7.2% being offered discretely below the screen bid prices without disrupting the perception of the rest of the market.

Give yourselves a pat on the back if you had resisted the urge to buy the distressed papers back in June this year. Bumi Resources has just delivered a whopping 50% loss for those who had succumbed. https://tradehaven.net/market/darlings-to-defaults-bumi-resources/

Bumi Resources USD 10.75% 10/2017

Bumi Resources USD 10.75% 10/2017

 

The other big concern for the wholesale market is the state of health of the sovereign wealth funds, many of whom have risen due to oil monies.

AFR – “Fears of ‘global margin call’ as oil slumps” –  “Ten of the world’s top 20 sovereign wealth funds derive their capital from oil and gas revenues. The risk is that these sovereign funds are forced to liquidate positions to help keep the governments afloat” http://www.afr.com/p/markets/fears_of_global_margin_call_as_oil_VmAzOMCOJZdjUMChcEdDiL

Unwieldy positions are the biggest risk because there is no counterparty in the world to take it over unless you sell to a buyer of equivalent stature and there are not many of them around unless we consider vulture hedge funds.

Perhaps the ECB or the BoJ ?

And we should not forget to throw in the sudden surge in geopolitical risks around the world with Greece having their presidential elections which has caused their stock market to nose dive in a spectacular 20% in 3 days. Bond holders of their newly issued 4.75% EUR 04/2019 paper are smarting as well for the heavily oversubscribed bond has lost 16% since issuance, trading at 83.65, after rallying to a high of 104 back in September this year.

GREECE EUR BOND

Hellenic Republic EUR 4.75% 04/2019

 

The importance of the Greek elections as a game changer is a truly convoluted concept that only the country that is the birthplace of the word “politics” can conceive. Basically, 3 attempts  by parliament to elect a president, if that fails then a general elections will take place with the risk of the  anti-Euro party, Syriza, taking power. http://money.cnn.com/2014/12/10/investing/greece-syriza-why-it-matters/index.html

My thoughts :
1. Government is a basket case and this is the best chance for incumbents to get out and pass the buck to the next government.
2. They are hoping to reap a windfall from the silly foreign investors who had all bought at the high.

Do note that we have a few other elections that matter too, starting with Japan this weekend.

Finally, we have the most underestimated risk – the USD story. Foreign corporates who had issued in USD is facing the added burden of exploding liabilities. And that is a near 10 trillion dollar market we are talking about. http://www.breakingviews.com/strong-dollar-is-$10-trillion-headache-for-debtors/21177290.article

The current market is highly sentiment driven at the moment with mood swings along with oil prices which, I repeat, is supposed to be a good thing for consumers.

As long as these risks persist, it does look like the the US long ends will continue to the best performer in town, even withstanding next week’s FOMC which if hawkish, would only affect the short end papers and if, dovish, would give asset markets some temporary reprieve.

Let’s see which bank dares to suggest chasing yields for their 2015 outlooks ?

The bond market winter has just started.

Leaving with the indicative bond prices which I would not touch with a 10 foot pole but should be indicative enough to give folks an idea of where the market is heading.

There has not been a single issue in 3 weeks now even though Garuda is considering doing a SGD bond issue.

Garuda Considers Selling SGD Bonds to Refinance Debt
Dec. 12 (Bloomberg) — Co. considers selling up to $500m of bonds to reduce cash flow pressure, Finance Director I Gusti Ngurah Askhara Danadiputra, says in text messages.
Co. seeks several options, including SGD bonds: Danadiputra

USD Bond Prices (indicative)

USD BONDS

USD BONDS 2

SGD 2014 Bond Issues

 

SGD 2014 CORPORATE BONDS