We’ve been harping on about the risk of a bubble building in China’s corporate bond market for a while now. The point being that the waves of cash which slosh around inside China’s borders looking for an investment to call home have flowed/ crashed into the corp bond market with increasing speed over the past few months — helped, rather obviously, by easing measures being taken to arrest China’s slowdown.
That corp debt ramp-up might start to slow now that the stock market, and margin debt, is staging a comeback but the question of whether a bubble might be about to pop still remains.
The short answer appears to be “no” if you assume that defaults are still a no-no in China. Read more
A cut out and keep on those triggers, from HSBC, to be read alongside all of the China corp bond market nuttiness that’s around at the moment and the resurgent A-share story.
Stop me if you’ve heard this one before…
China’s bond markets are nuts — particularly at the moment — and are doing a poor job of pricing risk. Over a future unspecified timeframe the government will have to normalise their operations or risk everything getting out of control and messy. In the shorter term we can only gawp and remember that said government has the firepower to keep things going for quite a while… assuming, which we do, that it wants to.
On the more general nuttiness, here’s BofAML’s China equity strat guy David Cui (with our emphasis): Read more
ICYMI, China’s corporate bond market has gotten a little weird.
Take this (is nuts) list from HSBC (in a note which has already been picked up by Tracy Alloway):
But as China re-leverages to offset slower growth, the co-existence of tighter credit spreads, rising corporate debt, and falling profits is creating highly visible abnormalities, including:
Total debt as percentage of GDP has reached an unprecedented level of around 250% – 160% from corporates… 60% from government and 30% from households.
The producer price index (PPI) has been negative for 43 months.
Commercial banks are obliged to buy local government bonds at low yields
China Vanke, a leading property developer, priced a corporate bond at 3.5%, 4bp lower than the yield of China Development Bank (CDB) bonds, which enjoy sovereign support.
Once upon a time people thought central banks could boost business investment by lowering interest rates.
Thus America had its Large-Scale Asset Purchase programmes, which, according to the Fed, lowered longer-term Treasury yields. Again, according to the Fed, part of the appeal of these purchases was the impact they would have on investors with fixed income liabilities. Unable to hit their return targets with safer bonds they would be forced to buy riskier instruments, which, in theory, should improve the flow of credit to businesses and households and therefore spending. Read more
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
FT Alphaville has written before about how the pronounced collapse in the price of oil appears very reminiscent of the disintegration in the value of a certain subprime financial asset; both have been swift, disorderly and self-reinforcing.
A new report from The Bank for International Settlements emphasises the latter dynamic by drawing a connection between the vast sums of money energy companies have borrowed from investors in recent years as well as the retreat of traditional dealers from certain commodities-related transactions. The new dynamic has imparted a swift and sudden forcefulness to the recent price action in the crude price that goes beyond the effects of a simple change in production and consumption of oil. Read more
Is that the calming fragrance of sanguinity? Perhaps. Lets return to the bond market and the state of answers to the question: what will happen if, when, maybe, interest rates go up instead of down.
The fear, simply put, is that at some point there will be an awful lot of sellers of bonds, and very few natural buyers. For the corporate bond market in particular, banks don’t hold as many bonds as they used to, and can’t take the sort of risks that buying big piles of bonds when everyone else is selling would imply.
If you are in a job, say manager of a bond mutual fund, where you have to give customers their money when they ask for it, this might make you nervous. If when maybe that day comes. Read more
Reuters is reporting that the European Central Bank might be willing to purchase corporate bonds as part of its €1 trillion effort to restore “the size of [its] balance sheet towards the dimensions it used to have at the beginning of 2012.” The story has also been picked up by the FT and WSJ.
We didn’t immediately get why the ECB would decide to do this, especially since spreads on even the junkiest of junk debt are still quite narrow. (Lufthansa’s recent 5-year note yielding just 1.1 per cent at issuance comes to mind.)
One explanation is that the size of the markets the ECB has already agreed to target — asset-backed securities and covered bonds — is too small for the central bank to achieve its objectives. Read more
Residents of emerging markets owe hundreds of billions more dollars (and euros) than previously thought, because they have sold bonds offshore that don’t get counted in national statistics. An IMF study released at the beginning of the year measured the size of the discrepancy:
Gary Jenkins at LNG sets out his views about what might happen to the corporate bond market once the Fed begins pulling back liquidity seriously.
It’s all down to the vanquished liquidity in the market already.
As he notes on Wednesday (our emphasis):
The concern at the present time is that as the Fed starts to remove the extraordinary stimulus that they have injected into the market interest rates will rise which will in turn lead to selling of corporate bonds. One theory is that the lack of liquidity in the corporate bond market will exacerbate the problem and thus prices will move very sharply downward as a host of sellers are met by very little appetite for risk by the natural providers of liquidity, the investment banks.
There is little doubt that day to day liquidity in the corporate bond market has reduced substantially since the Great Financial Crisis. Risk appetite has reduced and regulatory changes have also had an impact. A chart that sums this up very well was produced by the credit strategy team at Deutsche. I reproduce it below:
Every month, the US Treasury publishes data on international capital flows by the type of asset and the country in which the transaction occurred.
In a recent note on the latest data, CreditSights highlighted something we found very interesting: foreigners appear to have stopped buying US corporate bonds (on a net basis) during the crisis and have refused to return to the market in the years since. The truth of the matter is a little more complex, but still interesting: Read more
Or simply giving money away?
There was much hoopla late on Wednesday as Verizon got the world’s largest corporate bond sale away — some $49bn of paper which will help to buy the rump of Verizon Wireless back from Vodafone.
Here’s a little table from Marc Ostwald of Monument Securities that hints at the excessive premium offered by Verizon, along with the instant profits on offer to investors here: Read more
There’s an oft-quoted number in the debate raging over liquidity in the bond market.*
It is, depending on the week, 75-78 per cent — the amount by which dealer banks’ inventories of corporate bonds are said to have declined since their peak of $235bn in 2007, according to Federal Reserve data. Read more
Take note of the following story from IFR. It could turn out to be very important:
Jan 4 (IFR) – The yield-to-worst in the high-yield market dipped to its lowest level ever this week, as risk markets rallied on the fiscal cliff agreement. Dropping below 6% for the first time in history, the yield to worst on the Barclays high-yield index fell to 5.96% on Wednesday and pushed even lower to 5.90% on Thursday. This compares to 6.13% on Monday and 8.14% at the start of 2012. Read more
Central banks have kept rates ultra-low since the financial crisis, trying to stimulate economic growth. Whether one regards this as successful or not, one can agree that it has costs. A line item with a particularly nasty looking question mark above it is a corporate bond bubble. Read more
From the FT’s Barney Jopson and Vivianne Rodrigues:
Amazon was set to issue a bond for the first time in more than a decade on Monday, taking advantage of rock-bottom borrowing costs as it continues an investment drive that is withering its profits.
More euro gloom.
From S&P ‘s Global Fixed Income research team on Tuesday, “Europe’s Sovereign Crisis Continues To Erode Credit Quality.” Read more
A safe assets-themed argument in three charts, from Barclays’ latest global outlook. (Click to enlarge)
In the States, we’re still picking our jaws off the floor from the lowest CCC-rated issuance yield on record, earlier this week.
In Europe… Societe Generale’s credit strategists have an interesting round-up: Read more
At a time when traditional dealers are being squeezed by growing regulatory burdens — think Basel, TRACE and the Volcker rule — the incentive to hold market inventory is diminishing.
Not only is it expensive and risky to manage bonds, equities or commodities, there’s the fact that the old models push the boundaries of what’s acceptable in terms of principal risk and proprietary trading. Read more
Hello, credit rally — tables via Credit Suisse (click to enlarge):
Bit of a Volcker Rule/whither market-making talker from the WSJ… BlackRock is back touting post-bank ‘internal’ trading for its clients.
Feels like it’s been building a trading platform since forever actually… Read more
Shandong Helon! We told you to remember the name.
Either this indebted fibre company would default on a RMB400m ($63m) bond coming due on April 15 – thus becoming the first domestic corporate default in Chinese history, and so maybe a sign of a maturing bond market – or it wouldn’t. Shandong Helon could simply get a local government bailout or a bank loan refinancing instead, under the ‘old’ rules of the game in China. Read more
Shandong Helon. Remember the name.
HSBC analysts have pointed out an interesting possible ‘first’ for China (H/T the FT’s Tracy Alloway): Read more
Monday is likely to have been one of the busiest days for corporate debt issuance so far this year, with $20bn of deals in the pipeline, the FT reports. Seven investment-grade deals of benchmark size, which is usually at least $1bn, were expected to price on Monday, adding to at least $4bn of high yield or junk rated deals. Issuers have rushed to market following a drop in corporate bond yields to record lows. Average yields on investment grade bonds on Friday fell to a new record of 3.27 per cent, according to an index from Barclays Capital that dates back to 1973. European high-yield issuers are also tapping US markets in their droves, with 44 per cent of debt sold this year denominated in dollars, versus 31 per cent last year, Bloomberg says.
IBM and Procter & Gamble have sold bonds with the lowest interest payments on record for US marketed corporate issues, as investors accept low returns for the safety of owning debt from secure companies, says the FT. IBM sold $1.5bn of three-year notes with a coupon payment of 0.55 per cent, the lowest for unsecured debt of that maturity at least since Dealogic, the data tracker, began compiling this information in 1995 on US marketed corporate issues. That yield compares with the three-year Treasury note’s 0.31 per cent. The US information technology company also sold $1bn of five-year debt that will pay investors 1.25 per cent, the lowest coupon rate for five-year debt. Also on Wednesday, Procter & Gamble, the consumer products group, sold $1bn of 10-year bonds with a coupon payment of 2.30 per cent, a new low for 10-year US corporate debt.
SABMiller, the brewery company, sold $7bn of bonds on Tuesday, in the biggest day for corporate issuance in the US in two months. SABMiller sold $7bn of bonds split into maturities of three, five, 10 and 30-year maturities to help finance its purchase of Australia’s Foster’s Group, the FT reports. It was the largest bond sale in the US since March 2011, when Sanofi-Aventis sold $7bn, Dealogic said. With markets volatile since the latter half of 2011, companies have become increasingly opportunistic. That has led to bursts of debt issuance when the broad financial markets are steady or positive and days when deals quickly dry up if the over-arching mood sours. Other issuers on Tuesday included John Sevier, Enbridge, Macy’s, Valspar, Arizona Public Service, Entergy, and Alabama Power, reports WSJ MarketBeat.
UK companies plan to treble the value of bonds they issue direct to the public next year, as they seek cheaper financing from private investors hungry for yield, the FT reports. Research from Evolution Securities estimates that primary issuance of retail corporate bonds will exceed £3bn in 2012 – building on 2011’s “watershed year”, in which just over £1bn-worth of bonds were offered via brokers using the London Stock Exchange’s Order Book for Retail Bonds. In total, there were 12 new issues specifically aimed at private investors in 2011, which raised a total of £1.22bn – a 33 per cent annual increase in the number of issues, and a 377 per cent rise in the amount of debt financing secured. By contrast, Evolution calculates that issuance in the wholesale market – where institutions and fund managers buy corporate debt – rose in the first half of the year, but has since fallen by more than 20 per cent.
Back in September, the FT reported an interesting estimate by JP Morgan.
Twenty-eight European banks would have faced a total liquidity shortfall of €493bn at the end of 2010, if they had been forced to meet new liquidity requirements (which actually come due in 2015) then and there. Read more