Bonds In Conversation : The Blessed Relief Of Playing With Fire

I say this week ends with blessed relief and double that for me because I narrowly escaped major damage from a little fire incident in the living room.

Bonds In Conversation : The Blessed ReliefNo more playing with fire for me just like the Fed’s surprise (or not so surprise) decision not to hike last night which leaves them in the running for the Most Popular Central Bank Award of the decade.

Like I said this week, we are in this for the long haul and having recognised that the reality is one of secular stagnation ( despite the heavy ammunition of QE should keep us up at nights, like Ray Dalio of Bridgewater who is “worried about the next economic slowdown because monetary policy will be less effective than in the past”.

Not that we will have anything to worry about because this growth upturn cycle is in its 75th month of recovery, according to Moody’s, and the consensus amongst economists is that growth should expire in 2018 which means the Fed has little time to hike much more than 2% from now till then before the rate cuts again.

What a new world ! And Bernanke is right that he will never see higher rates in his lifetime and I see little profits left in bonds, if losses do not start mounting from the defaults that are to come.

I never thought I would say this, but stocks look like a decent bet now that the risk free rate benchmark will be capped even if the Fed starts hiking in December to the 2% target.

The reasoning is simplistic. We are in an ever more interconnected world than ever before with top performing assets and the lowest returning assets highly correlated and year to date returns for equity indices have been awful e.g. STI index -13%.

Fx Thoughts : And A Year Ago

Bonds will continue to see pressure from maturity rollovers going ahead because of the market illiquidity and we shall not see a return to risk as we have earlier this year after the episode of negative yields. Markets have been conditioned to afraid after the nasty tumbles we have seen in the past 2 months that resulted in even a loss of liquidity in FX space, something that is actually quite easy to imagine if everyone is in the same boat.

Central banks have limited ammo after BofA nicely pointed out that we have had 697 global rate cuts since the last Fed hike.

Bonds In Conversation : The Blessed Relief Of Playing With Fire


Rest up, for we shall not be seeing central bankers play too much with fire for the time being.


Corporate Bonds

High yield issuance has tumbled nearly 70% in the past month as the pipeline for re-financing swells. This compares to a slowing of 26% for the entire corporate bond market.

“The record high issuance was aided by yield-hungry investors, accommodative global monetary policy, and relatively calm financial markets. The $602 billion in global high yield bonds issued last year edged out 2013 for the all-time peak, and more than doubled the $298 billion annual high from the previous expansion for the year ending June 2007. Booming merger activity gave further life to higher risk lending this year, but global economic concerns and costlier credit are putting speculative grade borrowing on a downward path” Source : Moody’s

And Investment Grade issuance has already doubled in size since end 2007 which leaves the HY market in a lurch at the moment for all the outstanding debt out there especially when the projected default rate is the highest since 2009 which means we have defaults to come given that the current Bloomberg Corporate Bankruptcy Index is still looking healthy.

Bonds In Conversation : The Blessed Relief Of Playing With Fire 1

If we go through total issuance for the past 18 months, we have half the bonds trading under issued price for USD Asian credits and just 25% of SGD denominated bonds issued in 2015 that are above water, mainly because SGD interest rates have bucked global trends.


Indeed, Singapore is the one of the worst markets to be in this year, underperforming in every aspect vs the rest of the AAA world as funding rates break 6 year highs on a daily basis.

SGD Weekly : Scratch Your Head And Miss The Boat


Issuance has freezed up as investors find themselves stuck in their purchases making it difficult for banks to market any new issuances to them without risking capitulation.

Like I pointed out on Tuesday that it is the best time to hitch on the anomaly in Singapore, 10Y govt bond yields have collapsed 0.1% overnight giving investors a 1% instant return.

I still believe in the pockets of opportunity in Singapore, ruling out credits at the moment mainly because prices are unstable and we see some major price changes in the past fortnight from market adjustments of credit spreads that is long overdue along with noteworthy gains for some of the oversold names.

Leaving with the indicative prices.

2015 SGD Corporates

Bonds In Conversation : The Blessed Relief Of Playing With Fire 2

2014 SGD Corps

Bonds In Conversation : The Blessed Relief Of Playing With Fire 3


Bonds In Conversation : The Blessed Relief Of Playing With Fire 5

Bonds In Conversation : The Blessed Relief Of Playing With Fire 6