Alternatively: SOE, do we have credit pricing in China?
Click for the (Mandarin) notice sent by Baoding Tianwei on Tuesday, informing bondholders that it would be missing a $14m interest payment and thus making it a rare Chinese corporate default. Like Kaisa. But not like Kaisa. Because Baoding’s also part of a state-owned company, China South Industries. Read more
From RBS’s Alberto Gallo and team:
Gallo is, selectively, very bearish (not on India though, natch) for the obvious reasons: Read more
Last week we got a Draghi-backed report by the ESRB which challenged the risk-free treatment of sovereigns by banks.
It included such insights as “the evidence presented in the report illustrates, however, that sovereign risk is not a novel concept” and “If sovereign exposures are in fact subject to default risk, consistency with a risk-focused approach to prudential regulation and supervision requires that this default risk is taken into account”. Which, you know, makes sense.
Thing is though, it doesn’t seem like the bank-sovereign nexus is going anywhere fast. As Gary Jenkins put it:
The tone suggests that the ESRB would like to see a change in the regulatory regime although it is clearly a case of ‘Give me chastity, just not yet,’ as this is also the week that the ECB began its QE programme without differentiating on risk between 3 year or 30 year bonds. They have set a yield of -0.2% as where they are prepared to buy anything. Thus technically holders of 30 year bunds could say that is the level they are prepared to sell at.
A great piece on the US bond market by Tracy Alloway and Mike Mackenzie has plenty to consider on Monday. Some will be familiar to those in the market — there have been a ton of inflows and liquidity has dried up — but ponder also some of the behaviour described when it comes to allocating bond sales.
Because rules for bond allocations are not set in stone, most bankers and fund managers do not believe they are doing anything illegal, though some expressed misgivings about a practice they describe as more art than science.
A long boom, insatiable demand for what banks are selling, possible different treatment of the large and the small buyer. Any of it starting to sound familiar? Read more
Here’s an arresting chart from CreditSights, which shows the face value of all dollar and euro corporate debt outstanding:
Finance, particularly the fixed income variety, lends itself to maths which suggest neatness — messy human hopes and satisfactions captured in a price, shifting but true for any particular moment in time.
There tends to be a number in any financial calculation, however, where neatness is that of a carpet under which dust and junk has been swept. In corporate valuation models it might be the discount rate used to put imagined future cash in present day terms. For stock markets it is the equity risk premium, and for bonds it is something called the term premium.
We’ll lift the carpet below, but the reason for doing so is HSBC, which thinks there isn’t enough term premia in bond prices (they are too high and so must fall). Read more
Over in Mac McQuown’s Sonoma Valley workshop, courtesy of Bloomberg Markets…
McQuown says his eBond will enable investors to jettison their credit risk because the swap, which is essentially a form of insurance, will cover their losses should the debtor fail. To garner such protection now, an investor must purchase a swap separately to cover a bond. Read more
Jeffrey Gundlach, founder and head of the LA based bond management shop DoubleLine, was talking about infinite quantitative easing years ago and is one of the most prominent bears on the investment scene, correctly predicting last year’s fall in bond yields.
Tuesday’s presentation was a variation on that theme, with the investor warning that while lower oil prices help the US economy, watch out for the impact of the shale boom deflating. A few choice slides below, starting with one to keep in mind on the US stock market.
We always hesitate to use the word unprecedented.* Still, another year of gains for US stocks would be the seventh in a row and, well… Read more
Whilst strolling on a beach in southern California over the holidays, we were inspired to try our hand at songwriting. (The topic may or may not have been partly inspired by our location.) After toying around with our initial idea for a while we managed to produce a few verses and a refrain. Feel free to suggest additional lyrics in the comments. To the tune of Jingle Bells:
Rolling down the curve
With my Eurodollar strips
Making tons of money
‘til the Fed hikes 50 bps! Read more
People have several ways to bet that interest rates might rise. One method has been falling out of favour for most of this year.
The obvious approaches are 1) selling interest rate futures or 2) borrowing bonds in the repo market to sell them for cash. The main advantage of these techniques is that they let you pick which specific interest rates you want to bet on while leaving the others alone. For example, you might think that the one-year sovereign interest rate three years from now implied by the prices of three-year and four-year notes is unreasonably low but every other interest rate on the curve seems about right. You should short the four-year note and buy the three-year note. Read more
With the end of QE, just a quick chart to reiterate that central bank bond buying doesn’t work the way one might expect.
Far from reducing bond yields, when the Federal Reserve buys bonds, it tends to make yields go up. Equally, when it stops – or says it will stop, or tapers – the yield goes down. Read more
In 2013, US mutual fund investors started moving money out of bonds and into equities. Some thought that this was the beginning of a “great rotation” in asset allocations that would undo the changes that have occurred since the crisis. That might happen eventually but the trend has gone into reverse this year.
Chart via CreditSights: Read more
At the end of 2013, the CFA Institute surveyed its members on a range of topics, including the asset classes they thought would do best in 2014. The year isn’t over, but we thought it would be fun to update you on the status of those predictions.
The self-described data geeks at Citi have a new note on who buys euro-denominated bonds, and we want to share some highlights.
Even though European banks were endangered by their significant holdings of sovereign debt, their portfolios were relatively less exposed compared to pensions, insurers, and foreigners. Read more
We are one day away from Argentina’s second default this century. Drama or farce?
Farce. For all the confusion that was on show in Judge Griesa’s hearing last week, about whether Argentina’s restructured local-law bonds should join the foreign-law debt within the pile of paper at risk…
At least holders of these bonds will be OK after all on Wednesday.
Only just this once, though. And they were let off for a reason which underlines tensions we’ve been noting in the pari passu saga between enhanced powers to enforce sovereign debt, and the complexity of international finance. Read more
Or, how far is market pricing of credit risk catching on in China, after all?
Here’s your default-risk adjusted corporate bond yields in China from Nomura (our emphasis):
Liquidity injections and targeted easing so far this year has had a material impact on corporate bond yields. Corporate bond yields have dropped across the rating spectrum, while a similar narrowing of spreads can be seen relative to Chinese government bonds. Data provided by the China Government Securities Depository Trust & Clearing Co Ltd (chinabond.com.cn) shows that both 1yr and 5yr AA-rated bond yields have fallen, from highs of 7.22% and 7.63%, respectively, at the start of the year to 5.38% and 6.53% today.
A lot of people are puzzled over why US yields are falling when nothing has changed on the Fed communication side, and QE is supposed to be slowing.
Frances Coppola notes an even stranger phenomenon. When you look at the very big picture you realise that if there is a correlation between QE and rates, it’s actually a very counterintuitive one:
Every time QE is announced, yields rise: when it ends, they fall. And no, this doesn’t just affect the 10-year yield. The same basic shape can be observed on just about any maturity over 1 year (short-term rates are propped up by the positive IOER policy).
We thought we’d ask, given some of the ‘high-level principles’ suggested by the ECB and Bank of England to revive the dead market for securitisation in Europe: Read more
Some broad thoughts on the economic and market cycle arrive from Nikolaos Panigirtzoglou and team at JPMorgan, to help active investors (most of them, it seems) who are scratching their heads and looking perplexed.
Despite range trading and low market volatility, active investors feel extremely uncertain about markets. Very few have beaten their benchmarks and our model portfolio also is barely in the black YTD.
Some charts will help below but the central question is why, five years into a US expansion, have bonds not sold off more? Read more
Moscow doesn’t send tanks into revolting former vassals any more. It sends dollars.
For anyone who decides to follow the money when it comes to Ukraine’s split between the EU and Russia, the consequences can sometimes be grimly surreal when it gets to the prosaic matters of bond finance. Read more
A lesson in African sovereign debt disclosure courtesy of Mozambican Tuna and brought to you by Bloomberg:
Two months ago, Credit Suisse Group and VTB Capital financed a flotilla of tuna boats for Mozambique, then packaged the debt into notes for overseas investors. It turns out the fleet also includes anti-pirate patrol boats, according to the French Foreign Trade Ministry. They are capable of being equipped with 20mm cannons and military drones, according to Stratfor, a global security advisory firm. Credit Suisse is adamant that its funding wasn’t used for armed boats.
“We are not involved in Icelandic banks,” an Elliott spokesperson said.
Yes, that’s an on-the-record statement from the notoriously publicity-shy hedge fund. The Icelandic banks part is going to need some explanation. Read more
So what have the retail investors been up to? Buying stocks! But, even with yields down low and no-where to go, they are yet to break the bond buying habit.
The PRA works with the FCA and the FRC to improve the quality and usefulness of information disclosed on firms’ safety and soundness… Consistent with that, we will work with the FCA and the FRC to review the extent to which there is scope to extend bondholder influence over banks, with a view to bringing forward recommendations in due course…
– Bank of England (and Prudential Regulation Authority) response to the Final Report of the Parliamentary Commission on Banking Standards
Alternatively… the PRA need look no further than the wreckage, on Monday, of the Co-operative Bank’s plan to deliver the £1.5bn recapitalisation they ordered.
Plan B (for Bondholder) has taken over. Read more
From the Orders of the Supreme Court on October 7:
This is a defeat for Argentina. Any legal setback is. But it’s also perhaps not the end of the prospect (however distant) of Justices Scalia, Ginsburg et al debating the pari passu saga. Read more
Is this hundreds of basis points safer than the Greek government?
You might well ask. Read more
Monday — The Co-operative Bank takes flak from yet another group of its bondholders for refusing to consider any sort of Plan B in getting them to share the burden of recapitalisation.
Friday — It starts considering Plan B. Read more
We hear that this year’s exodus from the US muni bond market by retail investors, nervous about the coming bond pain (from higher rates and Detroit nerves rather than predictions of default and disaster), has fixed income hedge funds dipping into the $4tn market.
Hence positive momentum for muni’s last week, which Citi declared was “swimming against the bond fund tide”. Read more