Singapore Corporate Bonds 2014 Xmas Special

Announcement

In the spirit of the season of giving, Tradehaven is launching our 2015 annual appeal for sponsors and donors, a request I find as unappealing as the unsavoury prospect of the troublesome birthday which happens to fall in this period.

Our estimated funding required for 2015 is SGD 30,000. We need 300 readers with the spare 100 dollars to make this come true.

The plan for Tradehaven into 2015 would be to embark on a site overhaul after we cross the bridge of securing the overhead costs for the year which depends on the generosity of readers, friends and the readers who have become good friends in the past year.

A Big Thank You In Advance for your support, readership and fellowship.

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My obsession with statistics continues in seasonal fervour as I realised that 2014 has been more of a bond bashing year for me that I felt I had to justify somewhat after receiving the alarming feedback that I have come across as doomsayer for most of the year, as opposed to the sugar coated stuff that readers get from banks.

In any case, this project has been at the back of my mind since September when the chap sitting next to me at a wedding luncheon was proudly telling me that he bought about a dozen different SGD corporate bonds over a period of 2 months which included Miclyn Offshore at a price of 104 or thereabouts.

The best way for meaningful comparison would be to measure the credit returns and how they have performed.

While it is not the usual way some investors approach it as I understand because many investors do not hedge for interest rate risk, it is the way credit markets measure bond performance and investors can assume that the losses in credit spreads would translate to yield gains if the bond was issued today.

Running through most of the bond issues from 2012 to 2014, I approximated their credit performance, making no provisions for the shortened durations of the previously issued bonds which would give them an unfair advantage over the recent issues.

The results are not that surprising.

If you had bought a bond anytime in 2014, chances are that you would have lost out on the credit as compared to prior years.

Yet the 2 highest yielding bonds in the market these days were issued in 2012 – VTB Bank 4% 07/2015 and Swiber 9.75% Perp, indicating yields of 15.9% and 20.3% respectively although prices may appear a tad wide for any trades to occur.

The reasons for 2014 being the worst year out of the 3 to buy bonds is mainly because 2014 is the peak of the credit cycle, where spreads, on average, are at their tightest after peaking during the post Lehman crisis years of 2008-2009.

The JPM Asia Credit Index is the best illustration.

 

We also had the mad chase for yields in 2014 with intensified retail investor participation where less investor protection was warranted given the less discerning and more yield hungry customer base.

This is evidenced in the quality of issuers and the average issue sizes which were much smaller due to the high risk names with little demand seen from institutional investors.

The year was, in fact, a good year with many investors egged on by their early success in the first half which led to a banzai market place that was not adequately prepped for the ensuing correction that came with the oil price collapse in the second half.

Nonetheless, the wins in credit did not always automatically translate into gains for bond prices as 2012 was the low point in the interest rate cycle and yields started gaining in 2013 into 2014.

This is best illustrated in the 5 year interest rates.

Thus it is unsurprising again that 2012 was the bumper year for issuance with SGD 31 bio unloaded into the marketplace, fighting for investor attention and paying a higher spread for that.

Let’s take a look at those tables I have prepared. Some of the prices I find a tad suspect but given that the market is in sore shape these days (hearing a major bank downsizing on the trading team), I am making do with them for the purpose of education and information, urging readers not to base investment decisions on the data.

2012

2013

2014

At first glance, we have the usual loss leaders in all 3 tables.

We should feel a certain relief that most prices are holding up above the 90 cents/dollar mark, signifying that the market is either in a much better shape than the taper sell down last year, or that it is because activity is absent, leaving prices frozen to preserve valuation levels.

The global rebound in credit off their lows is definitely keeping a floor on prices as well, although funding rates have risen recently, putting a squeeze on short end bonds.

Long term instruments such as bonds warrant a medium to long term investment perspective and I am usually the wrong person to consult about such matters for my mainly trading focus as far as credits are concerned. But I do occasionally switch thinking hats when put on a spot by eager relatives and friends asking for advice and of course when I write all new issue reviews that some people find useful.

Yes, I have been nothing but dour in most of 2014 bond analyses and it was for a good reason – getting the best bang for the buck requires patience over and above the itch to get into the newest craze in town.

For those who are stuck with poorly performing holdings, I sympathise and hasten to remind that being stoic about may not a solution. Gritting your teeth and hanging on is good for marathons but not the answer to a bond gone sour.

I am not expecting defaults tomorrow but I suspect that things will definitely get worse before improving, during which some distress may arise.

Will be publishing a piece on my credit outlook for next year in the weeks ahead when I feel brave enough to stick my neck out on the block.

Cheers and good luck !