BONDS IN CONVERSATION : A PAUSE AND THE NEXT STOP

After last week’s mayhem, investors are breathing a sigh of relief that we are ending this week on a nice pause to the selling with sovereign yields all off their highs and signs of life returning to bond markets.

 

Yet I am here to give everyone some perspective.

Yields are still on an uptrend with real money accounts in a state of confusion. The situation can be described as a process of price discovery because no one really knows where we are heading which means we could see more volatility ahead although I would put the chances of a rally back to the hey days as pretty slim.

One of the main drivers of the recent volatility has been the absence of liquidity in the marketplace which is not surprising because the risk rewards are terribly skewed for investors at the moment.  (We wrote something about the Sharpe Ratio (risk-rewards) earlier this week – https://tradehaven.net/market/19929/)

And we wrote about the liquidity trap last year. https://tradehaven.net/market/liquidity-crunch-time-for-your-bonds/

“The liquidity trap works like this …

“…banks are now less able to facilitate trading in secondary markets, bound by stricter regulation and higher capital requirements. Low liquidity can “trap” sellers, accelerating price falls.” http://www.zerohedge.com/news/2014-09-23/blackstone-slams-broken-bond-market-despite-record-bond-issuance-driven-stock-buybac”

This year has proven that the market remains quite broken, all the way to the top of the food chain – the sovereign bond market and US treasuries. Corporate bonds are not moving as much because investors are just stuffed and stuck, to put it bluntly, and because they are unable to sell, the market has an eerie calm about it.

The rhetoric continues into this year for us to ignore at our own peril. Article to read for the week :

The $3 Trillion Bond Trade Citigroup Says Investors Should Fear

“The size of the U.S. corporate-bond market has ballooned by $3.7 trillion during the past decade, yet almost all of that growth is concentrated in the hands of three types of buyers: mutual funds, foreign investors and insurance companies, according to Citigroup. That combination could lead to more selling than the market can absorb when the Federal Reserve raises interest rates for the first time since 2006, Antczak said.”

That is something quite out of our control, in my opinion. The main concern I have  is that we have come to the crucial mid year for investors. That means portfolios will have to be re-looked at and all of them will be adjusting for 1 thing – the risk free rate of return, which is higher.

In the case of Singapore, some major adjustments would have to be made as rates have seen some massive moves in the first half and some govt bond yields are trading at their 5 year highs even if corporate bonds are still holding.

Such yield levels make reits and corporate bonds, along with other fixed income asset classes, look bad unless they correct back lower which they have done a little of, but it does not look like we shall go back to the lows that we are used to.  https://tradehaven.net/market/food-for-thought-what-are-sgs-yields-telling-us-to-do/

A second concern I have is the US Dollar’s strength which has become a bane for all outside the US especially those countries reliant heavily on USD funding, a statistic that has exploded in recent years.

 

So, we have a lot of bonds for us to buy out there and we have the Federal Reserve FOMC next week which will undoubtedly cause an uproar and volatility, either way, because markets are unprepared for what they are about to say and have no way of preparing, in any case.

Enjoy the pause for now and prepare for the next stop.

Leaving with the indicative prices.

USD Asian Bonds

2015 SGD CORPORATE BONDS

2014 SGD CORPORATE BONDS