BONDS IN CONVERSATION : PREPARE TO BE UNPREPARED

Happy SG50, Folks !
My web developers must have timed their delay perfectly to launch the new site tomorrow on NATIONAL DAY (or so they promise) and I apologise for the sporadic posts this week as I tried to make time for them to do their work !

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Sometime last week we learned that some leveraged credit closed end funds are being liquidated at “way below the value of their underlying assets, with the biggest discounts since the U.S. financial crisis” with “traders are taking a 15 percent discount to sell shares of the $1.3 billion BlackRock Corporate High Yield Fund relative to its assets’ value, and an almost 11 percent haircut on John Hancock Preferred Income Fund II shares”, which could be a sign of things to come for the credit markets beginning with the more illiquid junk bonds.

This week we are hearing that “U.S. financial regulators are stepping up inquiries into whether funds that buy debt are prepared for an exodus of investors as the central bank moves closer to raising interest rates for the first time in nine years.” http://www.bloomberg.com/news/articles/2015-08-06/u-s-regulators-said-to-step-up-scrutiny-of-debt-fund-liquidity

This has been the longest period of Fed Funds Rate malaise in history.

fed inaction longest period

Whatever that happens, prepare to be unprepared ! Because it is unprecedented.

I like this RBS observation that if you are 40 or younger, all you’ve pretty much ever known is falling long-term rates in the UK.

40 YEARS OF FALLING RATES

Another way of looking at it, we are all long bonds anyway.

As long as you have a mortgage, or a loan or an investment product that is interest rate linked or a dividend stock or reit or property, you will be exposed to interest rate risks. Interest rates, the risk free rate, affects the yield return of your asset or the cost of your liability which has been pretty much stable since 2009.

The only beneficiaries of higher interest rates would be the entity that is holding cash or cash borrowed at a locked-in term rate. That would include all those bond issuers such as Apple Inc locking in their CHF 875 mio for 10 years at 0.375% earlier this year or the world’s largest issuer for 2015, AT&T, borrowing 8 year Euros at 1.3%.

Equities which are bench-marked against dividends and stock returns, would not be spared unless earnings improve along with the situation. That does not appear to be the case for the coming quarter for the S&P 500.

 

Despite downward revisions in earnings (that has been a trend since 1976, according to Morgan Stanley), the indices remain in historically high territory – stock buybacks ?

Reported EPS is showing negative growth.

S&P 500 reported EPS weighted average gain or loss YoY

S&P 500 reported EPS weighted average gain or loss YoY, Monthly Chart

 

What about those HY bonds ? Looking peaky as we close the week down in prices for the year’s low in the HYG US ETF, along with lower 10Y US treasuries.

HYG VS GT10

iShares iBoxx US$ High Yield Corporate Bond ETF vs 10Y US Treasury yield Weekly Chart

 

Taking a look at global GDP revisions that Citi sent out last month, we really cannot have world growth driven by Ireland, Argentina and Switzerland, with the BRICS (Brazil, Russia, India, China, South Africa) and the MIST (Mexico Indonesia South Korea, Turkey) on the other end of the spectrum ?

downward revisions in GDP for 2015

I see Korea in a really tight spot these days, much more than China, as their export engines splutter to a stop led by shipbuilders, phones, cars and credit ratings are on their worst roll since record keeping began and is a big negative for their banks as well.

“Korea Ratings Corp., the local affiliate of Fitch Ratings Ltd., cut the credit scores of 40 local borrowers in the first half and raised the ratings of 5, the worst ratio since 1999. Similar scores at Nice Investors Service and Korea Investors Service were the weakest since 1998 and data going back to 2004 respectively.” http://www.bloomberg.com/news/articles/2015-07-29/korea-ratings-deteriorate-most-in-decade-as-export-engine-stalls

All of this happening as the Fed readies for their first rate hike next month, 18 September (2 AM SG time) or is all this happening because Fed is readying for their first rate hike ?

My answer is – Prepare to be Unprepared !

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In balmy Singapore, after the torrential rains and into our 50th anniversary of indepedence, we have a long weekend to buffer us from the whiplash of Monday morning’s opening where China’s shocking export numbers will hit markets along with the boring US Nonfarm Payrolls that has cemented expectations for a Sept rate hike.

O&G names still looking weak despite Ezion’s coup d’état last week in scoring that DBS “committed funding”. IG names seeing demand with the HDBs and MRT coming back along with the SGS rally.

The big news of the week would be the SGX introducing an “evaluated bond price” platform for public to access prices of bonds listed on the SGX which will cover most SGD corporate issues.

At this stage, I am not sure if it will do more harm than good given that investors may be coerced (despite disclaimers) into dealing at some of the prices listed there or alarmed at some of the levels provided when liquidity for some of the high yield names remain feeble.

My personal opinion is that it is pretty senseless that such efforts are being placed on developing a “perfect” B to C (Bank to Client) platform when the B to B (Bank to Bank) platform virtually does not exist which is good for arbitraging clients, I suppose. Nonetheless, it is a move in the right direction, of course and as usual.

Other good news that Noble has fully redeeemd their senior notes due 2015 and 2020 which has buoyed prices for the rest of their issues as well as their stock prices (results out on Monday).

Finally, we note that the USDSGD is trading on the weak side of the NEER which has led to short end fixings rising to some monthly new highs which is not causing major concerns as yet as government bonds rally on the week.

It is as MAS MD Ravi Menon says, For Singapore, pain before greater heights http://www.businesstimes.com.sg/government-economy/for-singapore-pain-before-greater-heights-mass-menon. And I note the date set for the greater heights is 2026….. then again, I did not read the entire piece too thoroughly, I suspect.

2015-2026 ?

Prepare to be Unprepared !

Leaving with the indicative prices.

G3 Asian Bonds

USD BONDSUSD BONDS 2

2015 SGD Corp Bonds

SGD 2015 BOND ISSUES

2014 SGD Corp Bonds

SGD 2014 CORPORATE BONDS