BONDS IN CONVERSATION : HAKUNA MATATA, THE FIRST AFTERSHOCK
7 weeks ago, we talked about the “aftershocks” after China pulled out all the stops.
And back then we wrote, “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.” https://tradehaven.net/bonds-in-conversation-pulling-out-all-the-stops-and-the-aftershocks/
10 weeks ago, we all knew “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.” https://tradehaven.net/market/bonds-in-conversation-a-matter-of-time/
We had a massive aftershock on Monday this week with the Fear & Greed Index near 0 (i.e. extreme Fear).
Of the “safe haven” trades in CHF, Gold, 10Y UST and VIX, the only 2 that delivered have been the 10Y UST and VIX, unless one had the presence of mind to catch those sharp moves of Monday night.
This week has been a golden opportunity, if one was relatively unencumbered and cashed-up, to buy into some bargains for the dead-cat-bounce.
My thoughts this week (after Monday) – surely all that stimulus and rate cuts and pension fund buying has to count for something ! Perhaps not in the heart of the panic, but surely in the weeks to come.
Second, it is clear that rationality counted for nought in the past 3 days with prices reflecting margin calls and stop losses more than logical analysis.
I am not sure if I will bet for a sustained re-rally back to the heights of last month, not especially when this could be the tip of the iceberg as far as credits are concerned.
Like we said 2 weeks ago, it is more about liquidity this year than credit concerns (so far).
What worried me this week has been these sort of headlines.
- Exchange-traded funds became hard to price as stocks tied to them cratered
- *DBXT MSCI INDONESIA ETF 10 : DISRUPTION TO MKT MAKING
*DEUTSCHE BANK SAYS RESUMED MAKING MKT IN ETF AFTER DISRUPTION
And the Moody’s warning that “the corporate credit cycle is past its prime” in terms of both economic fundamentals and volatility in the equity marketplace which bodes poorly for credits, predicting that the global default rate will rise to 2.7% by end 2015 from 2.4% in July.
It really does not look like much but HY spreads are at 3 year highs which is evident in my favourite ETF, the HYG US, which made a 3 year low this week before bouncing back to still about its lowest levels in 3 years.
A sign of confidence for bonds ?
I would ask myself if I have learnt anything from the market action of the past 2 months. If it is worth the risk of illiquidity ? Not counting the collateral damage that is yet to be unveiled …. such as this news on Jefferies this morning – “A team of distressed-debt traders at Jefferies Group lost almost $100 million this year as the rout in oil prices battered the value of bonds and loans of energy companies, according to people with knowledge of the performance.” http://www.bloomberg.com/news/articles/2015-08-27/jefferies-distressed-debt-loss-said-to-near-100-million-in-2015
With China dumping about US$ 100 billion in US treasuries within 2 weeks and many other central banks doing the same for their currency protection measures, I would not be over confident in bonds as yet with the exception of selected relatively good value papers. http://www.zerohedge.com/news/2015-08-25/devaluation-stunner-china-has-dumped-100-billion-treasurys-past-two-weeks
The market has built up a sizeable long in the 10Y UST, which is unsurprising given the Chinese selling, and we have not been this long since 2013.
The days ahead would be important to ascertain if this rout will sustain.
Taken from Business Insider,
“1. Of the 44 previous declines of at least 10%, 19 became bear markets (20%+ declines)
2. After a 10% correction, the median days to a bottom is 15.
3. Bottoms are V-shaped, and the recovery to the prior peak takes 1.4 times as long as the decline.
4. Markets bounce after 3-day waterfall declines, which is what we just experienced.”
I say, Hakuna Matata. We survived the first aftershock.
Not a single issue in SGD or Asian space this week.
More credit positives than negatives this week for Singapore, at last, as Parliament was dissolved on Tuesday and we have elections to look forward to.
Olam dominated credit space with their wondrous tie-up with Mitsubishi (A1 -ve/A+/AA-) which is, according to Olam, very good for their credit profile (as if Temasek is not enough) although the dilution of Temasek’s stake feels little credit negative to me, yet their bonds are up 2.5 to 4 cts today.
Somehow Noble got a boost from all this and their shares and bonds are outperforming the rest of the field.
In yet another Japanese tie up, Ezra formed a partnership with Chiyoda (majority owned by Mitsubishi) which is, in this case, credit positive.
Even luckier are the rest of the HY SGD credits, whose prices have barely moved in the absence of trading for the Business Times to declare that the market is resilient when it is probably a case of negligent pricing. I am not sure what to make of it when investors tell me that their private banks inform them that the price of the bond is 90 cts but IS NOT trade-able and someone else tells me they have an 88 offer under the table somewhere else.
The unlucky ones would be, ironically, the Invt Grade issues like the ultra tight LTA bond last week which has been affected by the 6 year high in interest rates and the fact that these IG bonds actually trade in the market. I suppose we could blame the untimely SGS 15Y auction which came a day before risk appetite picked up.
The optimism that the media has painted on HY bonds has caused the retail tranche of Aspial to be oversubscribed by 8.7 times, according to one of our readers which is excellent news for the institutional investors to be able to sell their allocations at a profit when the bond is launched.
We have pointed out some sizeable differentials between a couple of SGD bonds and their USD counterparts/comparables earlier this week but I would not expect a correction as long as the SGD market does not trade while the USD bonds go about their own business.
Hakuna Matata indeed.
Leaving with the indicative prices.
SGD 2015 CORPORATE BONDS
SGD 2014 CORPORATE BONDS