Advanced Theory & Practice of Bonds

Recognized under IBF-FTS | 7-8 June 2022 | 12 CPD Hours

Comprehensive 2-day course on bonds designed for private bankers, wealth managers and advisors.

Renewed trade tensions coupled with neutral commentary from the Fed Chair, after the FOMC cut interest rates by 25 basis points, triggered a move towards safer assets globally in the early days of August.

US President Trump imposed tariffs on an additional US$ 300 billion worth of goods. China is said to have retaliated by allowing the Renminbi to slide below 7 against the US dollar for the first time in 11 years. This spooked the bond markets as benchmark yields dropped across the board. The 10-year US Treasury dropped 31 basis points from 2.02% on 31st July to 1.71% on 6th August. The entire German yield curve fell into negative territory with the 30-year dropping below zero for the first time ever. The Dutch 30-year and Irish 10-year also fell below zero for the first time.

Falling yields drove 65% of bonds in the BEV universe to deliver a positive price return (ex-coupon) in July. Similar to the trend described in last month’s newsletter, July saw investor preference towards sovereigns and state-owned corporates. However, lower-rated bonds witnessed a widening in credit spreads as can be seen in the boxplot above.

In the boxplot, we have plotted the change in z-spread between 28th June and 6th August on the Y-axis against bonds’ credit rating on the X-axis. Z-spread is a measure of credit risk; an increase in z-spread indicates an increase in perceived credit risk and vice versa.

Typical to a risk-off environment, lower-rated bonds (BB+ and lower) witnessed a widening in spreads, which implies an increase in yields and hence a fall in bond prices. Spreads also widened for investment grade bonds, as measured by the iTraxx Asia ex-Japan 5-year IG CDS index, which spiked ~13 basis points from 57.5 on 31st July to 70.4 on 6th August.

Treasury Yield Curve Flashing Red

The 3-month US Treasury bill has now been offering a higher yield to investors vs. the 10-year Treasury bond for over two months now. This has been a flashing warning sign in the past, given that it has preceded past recessions and is thus a cause of concern for investors. In the graph below, we have plotted the 3-month yield vs. the 10-year yield since 1991.

Treasury curve inversion 6

As can be seen, the Treasury curve inversion (3-month yield > 10-year yield) has preceded the dot com bubble of 1998-2001 and the global financial crisis of 2008-2009. With the recent nosedive in the 10-year yield, recession fears have re-emerged driving investors towards low-risk assets such as government bonds and gold.

Asia ex-Japan G3 Issuance

Asia ex-Japan new bond issuance volume remained strong in July with total issuance at US$ 35.4 billion, 15% higher than the 1H19 average of US$ 30.9 billion. Issuance was however down 13% compared to June, which saw a 19-month high volume of US$ 40.5 billion.

High-yield issuers continued to tap market demand with new deals worth US$ 11 billion, 34% higher than the 1H19 average of US$ 8.2 billion and 38% higher than the volume in June of US$ 8 billion. Investment grade deals for July stood at US$ 20.7 billion, at par with the 1H19 average and 17% lower than June.

AxJ Issuance Volume - July 2019 3

Largest Deals in July 2019* (ranked by performance)

July saw the largest additional Tier 2 deal by an Australian bank with Westpac raising US$ 2.25 billion via a dual-tranche SEC-registered sale. The deal received robust demand with a total order book of US$ 15 billion, which explains the strong performance of the bonds in the secondary market. However, not all oversubscribed bonds perform well on the secondary markets, as was the case with Oman’s US$ 2.25 billion 10-year bond rated Ba1 by Moody’s, which fell over 2 points after listing.

Top Gainers & Losers – July 2019*

Hong-Kong listed Bank of Jinzhou received state backing as ICBC, China Cinda and China Great Wall AMC bought a 17.3% stake in the troubled bank. The bank’s 5.5% Perp jumped 10 points on the announcement.

GCX, a unit of Reliance Communications, held back US$ 350 million repayment towards its 7% bonds due on 1st August. The subsea cable operator said that 87% of its bondholders are prepared to wait for a few weeks as provided for by the forbearance agreement while they negotiate refinancing options.

Indonesian textile manufacturer Delta Merlin’s 8.625% bonds due 2024 dropped 75% just 4 months after its US$ 300 million issuance after the company missed a loan payment. Rating agency S&P cut the bonds ratings by 6 notches after the bond sell-off to CCC- citing “significant liquidity challenges”.


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