Bonds In Conversation : 2008, It Was Credit. 2015, It Is Just Liquidity

It is Thursday and day 3 of the Great Chinese Deval. Markets are getting the hang of it by now, and we are seeing risk return to the plate especially after the Great S&P 500 Turnaround last night.

The impact on bonds ? Covered bonds rose the most (+3.3%) on their index this week, followed by developed markets sovereigns while everything EM, including sovereigns, tanked.

Surprise, Greek bonds are the best performers on the week with their 10Y yields falling 1.4% to just under 10% as we speak. Worst performers – Colombia, Venezuela and Indonesia.

Tired of reading all the various theories by the strategists and analysts now out in force, spamming our In-boxes, I wonder how not a single one of them saw this coming and yet have so much to say now that it has happened. And since I am one of those who never saw it coming, I will shut up.

All I know is that after this Great Deval, the only currencies in the world that have held up against the USD this year has been reduced to 3 – CHF, GBP and HKD (peg lah).

What is important ?

“Until Tuesday the two biggest economies in the world — the U.S. and China — had shared the burden of stronger currencies,” said Stephen Jen, co-founder of London-based hedge fund SLJ Macro Partners LLP. “But we have likely seen China breaking off, leaving the U.S. as the sole economy bearing the burden.”

And the GBP and CHF, too !

What is more important and more significant as far as I am concerned is that Tuesday demonstrated a recurring theme that I have been harping on for the past few months – the lack of depth in the market and that friends, both retail and institutional, were unable to get bids for their CNH bonds with the reason given that the cross currency swaps were too volatile even if those bonds, being CNH, are not in the HY segment.

I suppose what you can’t sell, you have to hold and that is a good job is preventing a meltdown for the time being and I notice I am continuing on the same theme as last week – Prepare to Be Unprepared.

The liquidity problem is bad. Why ?

Because “the U.S. Federal Reserve has scheduled a conference at the New York Federal Reserve on bond market liquidity on Oct. 21 and Oct. 22”.

And the lessons for the week come from Citibank.

1. Investors have been moving in tandem, making markets far more homogenous.
Before, “markets used to be self-limiting. Prices of securities would move up to a point where their yields would become unattractive, at which time investors would trim some of their positions, causing prices to go down and yields to recover. Now the intense search for returns has altered that dynamic, with investors chasing inflows as a means of getting higher prices and higher profits.”

2. “New regulations that have made it more difficult or more expensive for banks to hold bonds on their balance sheets and to facilitate trades for their clients.”

Source :


The conclusion is that we shall have more jolts in between calm markets (because everyone is on the same side).

Bonds In Conversation : 2008, It Was Credit. 2015, It Is Just Liquidity

7 years ago, we sat through a credit crisis, Minsky moment that took the world off guard.

7 years later, I think the liquidity crisis is just unfolding but all is well when there is no liquidity. Watch out for those prices, especially the bids !


In Singapore, it has been a short issue free week with all eyes on fx and the USDSGD. Noble’s decent enough results failed to hold off a negative outlook from Moody’s on liquidity concerns overnight which resulted in the bonds giving up some gains.

For SGD’s currency underperformance, the growth story was cited along with mention of local banks’ loan quality which is fast deteriorating (big slump in share prices) and I suppose it is because there is not enough bond demand to issue more junk this year to the markets to replace those loans on the balance sheets.

For Asia, only 1 bond issue was managed before the Great China Deval and I am sad to announce that majority of CNH bonds issued in 2015 are now in the red.

Indicative prices coming up……