Bonds In Conversation : April Fools In Easter

03/04/2015 by

A happy Easter for bond investors, seeing price rallies around the world, except for those who wouldn’t play ball, like Greece, because even Russia feels the love these days.

We may not have felt the vibes in Asia but the fact is that US treasuries have gained in price for 5 quarters in a row.

10Y US TREASURY YIELD QUARTERLY CHART

The best performing bond market year to date in USD terms has been the Russian bond market, if we use this amazing chart from BAML that is dated 20 March. http://www.bloomberg.com/news/articles/2015-03-20/one-huge-chart-that-shows-the-winners-and-losers-of-global-financial-markets

Winners and Losers of Global Financial Markets

Looking at the table, bonds do not appear all that rosy anymore, coming out last which is no doubt due to the currency effect.

It is no wonder that issuance has only been brisk in US and Europe with March 2015 tying with September 2013 as the strongest ever month for US Invt Grade issuance at $143 bio and a new record was set in Europe for EUR Invt Grade issuance with €60bn printed out of which €39bn was from non-Eurozone companies locking in low yields (is it a wonder that the EUR currency suffered ? from all the outflows ?). Source : Bond Vigilantes

And if you had bought those Portuguese sovereigns with a currency hedge, I think you will sleep more soundly with your 11.5% year to date gains (issue price 99.74 on 14 Jan vs current price 111.28) than the person who had bought the Russian stuff.

It has been nothing else but currencies and central banks for the markets so far and we needn’t look further than China today, if you ask me.

Because the reality is this (from 2 days ago and SHCOMP is higher now).

The trend is for bonds and more bonds !

$811 bio worth of M&A deals struck in the first 3 months of 2015 and the slowest IPO markets with only 34 deals in the US so far that raised just $5.4 bio (half of 2014’s pace).

Tech start-ups receiving millions in venture funding and private deals and new mega hedge funds start-ups raising billions in fresh capital, a feat that has not happened since 2005.

Valuations are getting lofty and the best example would be the GoDaddy IPO which is expected to price above the expected range, for a company that is debt ladened and still quite unprofitable.

Yet is it ok for venture funds to value 2 Chinese taxi apps that are merging at $8.75 bio, because of the FUZZY, INSANE, MATH THAT’S CREATING SO MANY BILLION DOLLAR TECH COMPANIES = First One In Get The Get-Out-Of-Jail-Card-Free.

And it is not just the tech stocks, it is the biotech, the healthcare, banks and everything else except commodities.

If we are skeptical, we are normal because that is what Nobel Prize economist, Robert Shiller feels too. http://www.marketwatch.com/story/why-robert-shiller-is-calling-this-us-stock-market-a-great-enigma-2015-04-02?page=2

Yes, our confidence is challenged and so we buy bonds, bond yields drop and credit spreads tighten. But WAIT ! Guess where the bond funds are going to be channeled to ?

Yes. More M&A, more start-ups and more buybacks.

It’s April Fools In Easter.

I cannot be bullish at most of the current prices although I see pockets of value left. Things have gone a little insane and I think it is crazy to have inflation linkers all trading at negative yields.

Speculation on further easing in China has bought Asian credits breathing space and their own credits have gone on a joyride, and credit spreads are at their year lows now. What can I say ?

CS ASIAN CREDIT SPREADS

Singapore bond markets have also seen a resurgence of interest after the MAS announced Singapore Savings Bonds and intentions to bring in the ETFs. Banks rushed out 6 new issues in 2 days to close the quarter on an upbeat note.

We see Noble buying back some of its papers, Trikomsel rallying on news of Softbank acquiring a stake in the company (thanks to reader Jim, who alerted me to this), but for the rest of the papers issued this year, only a handful have delivered solid credit returns eg. Ciputra and PCRT. Names such as HNA Group tanked immediately after issuance, losing some 0.25% on yield, due to market indigestion (congratulations to those who bought at the lows !).

Do be cautious ahead and Happy Easter !