BONDS IN CONVERSATION : A MATTER OF TIME

Straining and stressful week all about the uncertainty in Greece, the FOMC and Chinese stock markets giving bond holders some temporary reprieve until the next trading week and new developments take root.

There is no clear vision for the future despite little green shoots of growth springing up in the West, the Asian region remains in stagnation.

The only certainties we have will be that it is only a matter of time before interest rates go up, Chinese stocks valuations will correct and another default occurs.

I remain bearish on bonds, noting that the 10Y US yields are holding near the highs of the year and that the 50 day moving average is crossing into the 200 day moving average, a possible sign that we shall see higher yields in the medium term.

10y ust yields

note the purple (50 day) line crossing the yellow (200 day) line

 

This comes as China is suspected of liquidating record volumes of US treasuries in Mar and April, although the pace appears to be slowing possibly due to capital inflows since. http://www.zerohedge.com/news/2015-06-15/china-dumps-record-120-billion-us-treasurys-two-month-belgium

Stock valuations are also suspect in China as numbers are drilled down from the harmless index, unveiling valuations that are 3 times more than any other market in the world and 2 times more than its peak in  2007.

“94 percent of Chinese stocks trade at higher valuations than the index, a consequence of its heavy weighting toward low-priced banks. Use average or median multiples instead and a different picture emerges: Chinese shares are almost twice as expensive as they were when the Shanghai Composite peaked in October 2007 and more than three times pricier than any of the world’s top 10 markets.” http://www.bloomberg.com/news/articles/2015-06-16/real-cost-of-china-stocks-dwarfs-2007-bubble-as-valuations-jump

Thus, it is just a matter of time as far as beliefs go.

“For Pau Morilla-Giner, the chief investment officer at London & Capital Group Ltd., mainland markets have become too speculative for international money managers to take part. Swings in the Shanghai gauge over the past 30 days are bigger than every other market worldwide except Greece, according to data compiled by Bloomberg.

“It smells like a bubble, it looks like a bubble, and it walks like a bubble,” Morilla-Giner said in an interview on Bloomberg Television in London. “Steer clear, that is the trade.” http://www.bloomberg.com/news/articles/2015-06-16/china-bubble-debate-turns-to-when-not-if-stocks-will-tumble

Finally, Moody’s notes that HY default risks are highest since Dec 2012 in their credit model and that also predicts that the ratio of corporate debt to core profits will continue to rise even as we break 3 year highs despite all the central bank support.

corp debt to core profits

Source : Moody’s

 

Asian bonds mostly gained after the FOMC which the HY and EM space names like Indonesia and Philippines a boost besides stabilising prices. With the drop in the Chinese indices for the week, prices could possibly come under pressure in the days ahead as more outflows should be expected.

Singapore yields and rates saw a massive drop of between 0.1-0.24% for the week as bonds started their rally into mid year close. The 10Y SGS is up nearly 2% on its cash price (97.33 vs 99.13). Short term rates remain unchanged as excitement builds into the DBS covered bond issue, the first of its kind for a Singapore bank. The issue which will be denominated in EUR or USD would potentially be swapped back into SGD proceeds and keep rates in check.

Main beneficiaries of the rally were the investment grade names and stat boards while the rest of the field were less fortunate. It is worth noting that interest has revived in the beaten down O&G names e.g. Otto Marine, although bid offer spreads are too wide for clients to do much.

It is all a matter of time, I guess.

Leaving with the indicative prices.

Asian Bonds

USD BONDSUSD BONDS 2

2015 SGD Bonds

SGD 2015 BOND ISSUES

2014 SGD Bonds

SGD 2014 CORPORATE BONDS