Bonds In Conversation : Holi Holly Holy

HAPPY HOLI, festival of colours and Spring after the smallest full moon of 2015 last night.

happy holi

For me ,it’s a reminder of Neil Diamond’s Holly Holy (youtube link), which was not my favourite song from my dad’s albums but a classic nonetheless, but their religious affiliations could not be more different. A bit like the Fed and the ECB.

Easier to listen to Neil Diamond than watching CNBC these days and it is  Holy indeed because we got the Holy number from Mario Draghi last night, for the magic yield that the ECB will tolerate which is -0.2% when they start their bond buying programme next Monday.

And that means only 1 thing. USD bonds should be the way to go given they are the biggest market (and supply) out there and the USD strength that arises from EUR weakness, both being the 2 most used currencies in the world.

We have less to fear from the real buying than the speculative front running that will come for the right reasons as well, with USD corporate bonds yielding twice that of EUR bonds exemplified by the recent Kellogg’s (Baa2) EUR 10Y issue at 1.25% compared to Exxon (Aaa) paying 2.71% in USD for the same tenor.

Source : Moody's

Source : Moody’s

EUR denominated bonds are also paying much tighter spreads that, perhaps, incorrectly prices credit risk.

This is a Holy Cow of a week, if you ask me as more and more banks and even the SEC came out to warn of systemic risks in the corporate bond marketplace.

Iceland’s Arion Bank(BB+) became the first to tap the public bond market with a successfully oversubscribed EUR 300 mio 3Y issue while India’s Lodha Developers (Ba3/B+) sold a 12% 5NC3 USD paper at 12%, the highest coupon for an Indian company in USD.

And it does not matter that an American oil driller, American Eagle, has missed their first coupon payment just 7 months after issuance or that Espirito Santo may renege on their agreement to repay retail bond investors, Peabody Energy (B2) managed a USD 1 bio second lien 7Y bond at 10% coupon.

All is well for the moment except that Moody’s is also warning that the increased share of mid-grade credits dominating bond markets will amplify contagion risks during a crisis.

Source : Moody's

Source : Moody’s

 

It is hard to be pessimistic on the brink of the  Q€ debut next week and a severe shortage of papers in the EUR space for the ECB to buy and 1.9 trillion worth of negative papers out there as we speak http://www.bloomberg.com/news/articles/2015-02-28/euro-area-negative-yield-bond-universe-expands-to-1-9-trillion.

Goldman, Citi and gang making bearish remarks almost on a daily basis.

CITI CREDIT RISKSource : Citi

It all hinges on the Fed now to shepherd the flock because as Moody’s note, historically, rate hikes have fueled substantial credit market losses as the market desperately hunts for yield in times of elevated stock valuations and safe havens dwindle to only 1 shore – America.

The BRICS are all bleeding but for one – India. Brazil is in red alert mode as their central bank hiked rates for the 4th time, another 0.5% to 12.75% as their reserves fell and inflation soars. Russia is a basket case, if we read everything that is out there. As for China, the market has never had this scenario before because China has never slowed down since they came into the picture.

With the Non Farm Payrolls tonight and the FOMC in less than a fortnight, we can only expect confusion to reign in the marketplace, especially with US equities at their lofty highs. And it is good to be afraid, noting that Singapore interest rates are still going at it – 6M SOR above 1% again as USDSGD made a new 4 year high yesterday.

SGS TABLE

Bond yields are going up again which is a good time to be looking at some of the government bonds, HDB’s etc. The only thing preventing the global carry players from entering the market is the global forex uncertainty (eg. Turkish Lira breaking record lows daily). Well, I did say this was going to be a trading year ….
I see myself changing my mind daily in 2015 where nothing is certain anymore and volatility returns to the marketplace.” Jan 2015

And the BT just reported that the Japanese buyers are coming as Singapore yields beat the world’s. http://www.businesstimes.com.sg/banking-finance/singapore-yield-luring-yen-after-topping-us-debt

I am not bullish on credits in general, they are either too tight or too risky. Even good names like Noble are coming under scrutiny not to mention the escalating scandal at state owned Petrobras which is now involving politicians. There is just too much to worry about.

We should be expecting more action in Singapore as A Reit just increased their borrowing programme to 5 bio (from 1 bio) and Rowsley did some investor meetings.

After the FCL perpetual this week, the banks should have a good gauge of market appetite for future perps and the secondary performance of FCL says that investor demand is not overflowing.

Well, hopefully Holi will make a difference !

Good luck !

 

Indicative prices of USD Asian Bonds

USD BONDS

USD BONDS 2

SGD Corporate Bonds Indicative Prices

SGD 2015 BOND ISSUES

SGD 2014 CORPORATE BONDS