Bonds In Conversation : Pulling Out All The Stops And The Aftershocks

Yes. It is the 40th anniversary of Jaws, the movie.

jaws tribute

It been a week of dropping JAWS for sure, staring aghast at the Chinese stock meltdown and the subsequent breathtaking rally that surely is a free option for all, like the free train ride I got on Wednesday morning because of those who had suffered the night before.

If the Chinese government will pull out all the stops to ensure that their stock market will not collapse and with the Greek rescue looking certain,  I think we have only good things to look forward to for the short term.

Yet, like we said 3 weeks ago, it is only a matter of time.

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.

The heavy price China has extacted on the markets will be sending ripples through their financial system for a while – embargo on substantial  shareholders from selling for the next 6 months, getting in the major shareholders of state firms to buy their own stock with 47% of the market still suspended.

We cannot have a major earthquake without an aftershock or two which is what we should be looking out for now.

Thus it is no surprise that bonds have done well for the week, sovereign bonds, I mean. Credits have widened, as we would expect with Chinese HY hardest hit, but the luckiest person is the one who had made on the VIX Index which is up 7% on the week and up about 25% from its lows this week.

What we have to look forward to ?

1. The side-effects of China’s rout will hit their GDP hard ! – consumer spending, cars,  real estate investments, corporate failures, corporate spending plans, fund raising, etc.
2. The side-effects of China’s rout has dealt a blow to investor confidence.
3. The side-effects of China’s rout is likely to affect the rest of Asia and we are talking about tourist numbers, investments, corporate exposure and such.
4. Greece will be the lodestone around Europe’s neck in the medium term despite the relief from a deal and euphoria that will follow.
5. Higher interest rates are still an eventuality for the US which is the benchmark for the rest of the world as policy makers realise that blanket bombing has not worked and macro-prudential tools are perhaps more effective.
6. Global growth will be stagnant as IMF revises their expectations lower each time.

imf gdp forecast

The 10Y UST saw a surge of demand earlier in the week to fizzle to its current levels which goes to show the lack of safe haven demand (or perhaps because China is the second largest holder of US treasuries outside of the US).

However, it is not just the US treasuries because the other traditional safe haven instruments have been shunned as well, referring to the price action of the Swiss Franc and Gold. (The SGD underperformed the PHP, rupiah and rupee for the week too !)

safe havens



It is definitely an oddity and only suggests that this week is seen as an aberration to the rally that, otherwise, must go on and the investment community is not prepared for any aftershocks to come, because the view is that China and Greece are isolated problems.

All I can say is that pulling out all the stops creates opportunities for once-off gains but creates vulnerabilities for the aftershocks that will come least expected.

I am still not bullish on corporate bonds except for the necessary allocation and that would be to comfortable credits. The high yield sector looks ripe for a correction and EM markets look caught up in quicksand.

My favourite HYG US ETF is tipping precariously off a lonely candle at its lows of the year.


iShares iBoxx $ High Yield Corporate Bond ETF is an exchange-traded fund incorporated in the USA. The ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, high yield corporate bonds.

As for Singapore, lack of interest remains the theme although we managed to pull off a single new public issue out of Centurion Corp even as the would have been largest IPO, Manulife US Reit, for the past 12 months was cancelled.

SGS have rallied but corporate bond prices are pretty much unchanged except for the high quality names, trading volumes have plunged and investors are not in any panic over their holdings that banks are not ready to bid for which is a happy state of equilibrium.

I suggest taking a look closer look at the safe haven chart above again.

Leaving with the indicative prices.

2015 SGD Corps



2014 SGD Corps


USD Asian Bonds