Archive for category Fixed Income Market
The financials market got off to a great start in 2013 as expected. Please refer the articles i have written in the past 3 months calling for this
The financial markets are likely to see a very strong year as equity risk premium for major economies such as EU, Japan, China, Hong Kong, South Korea are all over 10%. The fall in risk free rate plus the major compression of credit spread in 2012 has made equity markets one of the cheapest asset class out there. The other 2 asset class which could also perform well would be convertible bonds and high yield bonds as global default rate continue to fall on the back of quantitative easing.
Furthermore, in 2013 we are likely to see a repeat of 2003 and 1993 of which in 2003 the money that came out of the Nasdaq bubble fueled global risk assets including US subprime and asset backed markets which burst in 2007 . In 1993, the money that came out of post Japan bubble also fueled the markets in Asia ex Japan which resulted in the 1997 Asian Financial Crisis later on. I believe we are seeing a repeat here as globally central banks has embarked on massive quantitative easing and this year onwards the money is going to flow out of government bonds and money market funds to fueled risk assets especially those markets trading above historical risk premiums.
Stay tune for Part 3 of this article – as I analyze sectoral performance globally.
2 months ago I made this call on Chinese Equity Markets and Currency – Equity markets defied the fall last night to rally to new highs this month…What about other indicators?
2 months ago I made this call on Chinese Equity Markets and Currency. Since then the benchmark indices have rallied more than 10% to recoup all losses this year while the currency has hit a new 19 year high against USD
Debt offerings by weak/low credit standing companies guaranteed by Asian Banks have started to picked up recently. For example Doosan’s debt guaranteed by Korea Development Bank, China Cement debt guaranteed by DBS Bank and the latest the debt offering by China Cosco guaranteed by Bank of China.
Please click on the link below for full report by Bloomberg.
“If Cosco was on a standalone credit they would probably struggle to raise any money from the market,” Jeffrey Yap, the Hong Kong-based head of Asia fixed-income trading at Mizuho Securities Asia Ltd. said in a telephone interview yesterday
Still, the banks are taking on off-balance sheet risk by guaranteeing the debt, which could create problems if more lower-quality companies’ bonds are protected, according to Mizuho’s Yap. That could lead to a number of claims on the bank for funds, he said.
“The authorities need to watch out if the banks are putting on a lot of risky credit onto the book by guaranteeing the credit of those companies,” he said. “If we start seeing smallish companies, or even property companies, getting bank guarantees that’s what we need to watch out for.”
RMB has great opportunities for much bigger role in the trade flow between Africa and Greater China region. Please see my comments in Asia Risk
“Despite this uptick in interest in renminbi, trade and investment in Africa is still dominated by the US dollar: much of the Africa-China trade is resource based and therefore traded in the greenback. And despite the apparent existence of exotic currency crosses such as between the Zambian kwacha and RMB most are structured with the dollar as a go-between currency, according to Jeffrey Yap, managing director of fixed income trading Asia at Mizuho Securities”
For Full article please click
The current disparities between growth (+1.3%), deposit rates (zero!), inflation (5%) and property prices (20%) in Hong Kong its like watching a race between a hamster, tortoise, horse and cheetah! As mentioned in part 1 of this topic, the reason why there is inflation and upward pressure in monetary value of certain services and assets in Hong Kong is largely due to the demand from external factors. Similar to my analogy of Hong Kong resembling a shopping mall, most of the key products and services are targeted at serving/providing to foreigners (in a good way) The 3 key areas of growth for Hong Kong in this decade comes from the financial, property and luxury consumer sector which is largely targeted at foreigners (foreigner buying up luxury apartments, foreign companies raising IPO, foreign tourist buying up luxury products etc.)
Ok then you must be thinking what is different this time compare to 10 years ago? It is the HKD peg. Chinese Yuan and other Asian currencies have appreciated over 20% against HKD in the past 5 years and this trend is likely to continue with the quantitative easing in the west. The HKMA and Financial Secretary have denied the peg has brought about inflation? Look at 10 years Hong Kong Government Bond Yields 0.46%?! This is largely due to inflow of money and the result of increase in monetary base from defending the peg. 10 yrs yield at 0.46 while inflation is 10x of that??
Why are they in denial?They are just afraid to say it because given how well the peg has served Hong Kong, no one is going to change the peg, be it someone in HKMA, government or even the PBOC and the Chinese Government. One must also know this the HKD peg served as a good indicator for China on liquidity flow so why remove that….But something has to be done if we were to see a fairer race among the people in Hong Kong than the one we currently have. The peg can stay but for the sake of Hong Kong people who is reading, you should take your money out of the bank and move it into RMB, buy some equities or fixed income investments and last YOU mustn’t sell your property. If you don’t own a property in Hong Kong means you are short and the peg will kill you…If one decide not to do anything of such, they better make sure he/she gets a work in this mall or else you would be poorer even though the country continues to prosper….
PBOC Zhou And Commerce Minister Chen Absence From The China’s Central Committee List – What Would Be The Implications?
Interesting day with China political party announcing the new list of 205 members today on China state television after the party’s 18th Congress in Beijing, where a once-a-decade leadership change is taking place. The most relevant changes were PBOC Zhou and Commerce Minister Chen was absence from the central committee list which means Zhou will retire from PBOC and Chen from his post as Minister of Commerce. This is inline with what I have heard from onshore sources months back on the dissatisfaction of the recent policies adopted by the Ministry of Commerce and PBOC especially in preferring a weaker currency while draining liquidity from the system via RRR hikes. CNH and CNY appreciated to a 19th years high for the 5th day in a roll on the back of stronger official fixing today. With the absence of these old guards, we can expect further strengthening of the currency against global majors in the effort of promoting domestic demand and increase per capita income. We look forward to the new leaders to promote consumer and domestic credit growth which means further credit easing and capital market formation is likely. The offshore RMB market would be one major beneficiaries of this as well. Stay tune for further updates…
China plans to move toward full liberalization of interest rates, but hasn’t outlined a specific timetable for the reform. PBOC’s Zhou echoed the Chinese leader’s wish during the first day of the 18th National Congress of the Communist Party of China (CPC) which would last for a week. In President Hu’s speech, he emphasis on market developments, increasing domestic demand and improving people of China’s wellbeing by targeting a doubling of per capita income by 2020. I have no doubt the doubling of per capita income would be achievable but the quality of the income may vary significantly. I support PBOC Zhou’s push for interest rate liberalization because this step is needed to ensure a proper formation of the second phase of China’s monetary system to ensure capital are allocated efficiently to the hands of people and companies that produces the most economic and social benefits to the people of China. Even though I am not from China (but ethnic Chinese by birth!), I would be ecstatic to see this happening. Could you imagine the multiplier effect on mankind would be with 1.3bil people having the ability to contribute effectively to the world or at least able to improve the quality of their own lives? However, what would be the impact of such liberalization? It would mean further opening up of the banking and capital markets to global institutions, doing business based on market clearing levels and allow capital to flow to the highest risk adjusted return investments. However, Chinese financial institutions would need to innovate fast and moving up the knowledge chain at lightning speed to assist and be part of such liberalization. I witnessed the road to 1997 Asian Financial Crisis and my advise to Chinese leaders today is to ensure great governance over such liberalization. Liberalization is good if not great but only if it is done properly.
Leader Change Cuts Dim Sum Sales to Five-Month Low: China Credit
China’s once-a-decade leadership change has cut Dim Sum debt
issuance to a five-month low, as uncertainty about the new
regime’s monetary policy counters the cheapest borrowing
costs since April.
Sales of yuan-denominated bonds in Hong Kong slumped 38
percent from September to 4.14 billion yuan ($664 million), the
least since May, according to data compiled by Bloomberg.
Average yields fell to 4.76 percent last week, down 13 basis
points in October and the lowest in six months, according to
Bank of America Merrill Lynch indexes. Companies globally pay an
average 2.66 percent to sell dollar debt, the indexes show.
As Communist Party cadres meet from Nov. 8 to appoint
China’s next generation of leaders, issuers are pausing to
evaluate the new leadership’s monetary policy after two interest
rate cuts earlier this year. Premier Wen Jiabao said last month
the economy will keep showing “positive changes” after growing
2.2 percent in the third quarter from the previous period, the
most in a year. His likely successor Li Keqiang has yet to
signal his policy bias.
“Issuers will likely wait for everything to settle down
after the leadership transition before looking at debt sales,”
according to Paula Chan, managing director in the fixed-income
team at Manulife Asset Management in Hong Kong. “The market
seems to be pricing in no cuts to interest rates or the reserve-
requirement ratio but that’s to be affirmed.”
Top-rated companies paid an average 14 basis points less on
three-year debt in June on the day after the central bank
announced the first interest-rate reduction in more than three
years, according to Chinabond indexes. That was the biggest-
daily slide in six months, the indexes show.
The People’s Bank of China sliced rates to 6 percent in July, and
the central bank will likely hold at that level for the rest of the year,
according to the median of 25 estimates in a Bloomberg News
survey. In September, economists had forecast a 25 basis-point
reduction by Dec. 31.
“If you cut interest rates in China, offshore yields will be very
favorable for investors but it will discourage potential issuers,” said
Frances Cheung, a Hong Kong-based senior strategist for Asia at
Credit Agricole CIB. “For the general economy, cuts onshore would
be a symbolic move. It could boost confidence.”
Some issuers have chosen to sell dollar-denominated bonds
rather than Dim Sum notes given the falling cost of funding in
the U.S. currency, according to Jeffrey Yap, the Hong Kong-based
head of Asia fixed-income trading at Mizuho Securities Asia Ltd.
Citic Pacific Ltd. and Franshion Properties China Ltd. led
$2.43 billion of dollar bond sales by Chinese companies in
October, up from $800 million a month earlier, according to
Bloomberg-compiled data. Soho China Ltd. also plans to sell
dollar debt, a person familiar with the matter said yesterday,
asking not to be identified because the details aren’t set. The
yield premium that investors demand to buy Chinese corporate
bonds denominated in dollars rather than Treasuries fell to 376
basis points on Oct. 18, the lowest since January 2011.
“The primary reason we’ve seen relatively less Dim Sum
issuance last month is simply that dollar funding costs are
lower at the moment and companies can typically issue more and
with longer tenors in the dollar market,” according to Bryan
Collins, a Hong Kong-based fixed income portfolio at FIL Ltd.,
known as Fidelity Worldwide Investment.
The size of individual Dim Sum notes averaged 671 million
yuan this year compared with an average $927 million for Chinese
corporates’ dollar debt sales, data compiled by Bloomberg show.
The average maturity of Dim Sum bonds is 2.21 years, compared
with 6.42 years for Asian dollar debt, according to Bank of
America Merrill Lynch indexes.
The U.S. Federal Reserve, European Central Bank and Bank of
Japan have all announced bond-buying programs, prompting global
investors to plow more money into higher-yielding assets as more
cash was made available in the financial system. Emerging-market
bond funds attracted more than $1 billion for the week ending
Oct. 24, with two-times more capital flowing into funds in major
global currencies rather than local ones, according to data
provider EPFR Global.
The yuan climbed for a third straight month in October. The
currency rose 0.05 percent to close at 6.2372 per dollar in
Shanghai yesterday, extending its rally in the month to 0.76
percent, according to the China Foreign Exchange Trade System.
“The renminbi is now facing two-way fluctuations,” Credit
Agricole’s Cheung said. “Lately the currency has appreciated
again but I think the expectation is for it to be relatively
stable and if there’s any appreciation that will be very gradual.”
The cost of insuring Chinese sovereign bonds against
default using five-year credit-default swaps fell two basis
points to 71 basis points on Oct. 30, according to data provider
CMA, which is owned by McGraw-Hill Cos. and compiles prices
quoted by dealers in the privately negotiated market. Credit-
default swaps pay the buyer face value in exchange for the
underlying securities or the cash equivalent if a government or
company fails to adhere to its debt agreements.
Yields on China’s benchmark 10-year government bond were
little changed at 3.59 percent yesterday. Companies pay an
average 4.81 percent to sell Dim Sum bonds as of Oct. 29, 44
basis points less than at the beginning of the year, according
to Bank of America Merrill Lynch indexes. That compares with an
average yield of 4.44 percent on three-year debt sold by China’s
top-rated corporates, down 45 basis points in 2012, according to
China Guangdong Nuclear Power Holding Corp. led Dim Sum
sales last month, raising 1.5 billion yuan from three-year notes
that priced to yield 3.75 percent, according to data compiled by
Bloomberg. The power generator was one of four companies that
Chinese regulators approved to issue offshore yuan bonds earlier
this year. China Minmetals Corp., also one of the authorized
issuers, has yet to sell any of the debt.
“Given the leadership change things are slow,” said
Mizuho’s Yap. “But it still makes sense for Chinese issuers to
sell Dim Sum bonds.”
By Rachel Evans
China PMI rose as expected. This did not come as a surprise as indicators such as retail spending, freight volume, overtime etc has been on the rise recently. What is extremely encouraging was the reading was strong despite the general slowness in October with long holidays and leadership transition in the horizon. I am certain further picked up in economic activities and growth in months and quarters are very likely and the recovery seems broad-based too. Some critics who are unfamiliar with the developments in China might point to the lacklustre lending numbers but if one was to add the growth in debt issuance (which are typically long-term financing) the total pick up in financing activities have actually picked up in pace and in strength. I would suggest readers to position for beaten down sectors (credit and equity included) to have a good rally in the next 3 months. In debt, Chinese Property, Auto Sector, Cement, Retail while in equity, Property, Auto, Retail, Construction, Healthcare, Logistics, Brokerage would be my obvious sectors picks.
PBOC injected 395billion yuan today the highest number on record. 7-day repo rate plunges 123bps to 3.09% the largest drop since Jan 19. I believe many economist that called for RRR cut has been disappointed this year as PBOC and Chinese Government wants to control excess lending in unproductive economy and the move to inject liquidity instead of RRR cut is a sign that the authorities will start to move to boos the economy through other methods. I would expect tax cuts etc to come soon…
Running up to the US election and Chinese leadership change and now Hurricane Sandy, risk assets have pulled back last few days. I believe this week would be the best time to add risk assets to your portolio if you have miss the boat earlier. Global inflation have started to pick up and fund flows have move out of money market funds in search of yields and returns as US and China economic data points to further recovery. Right now many global investors has parked cash in low yielding fixed income instruments such as government bonds. Once global economy picks up slighlty and QE being withdrew from the system money will chase for higher return assets and given low valuation in the equity and credit space, we will see a long and sustain run up in the Risk assets in 2013.
The Export-Import Bank of China (China Exim Bank) sold 10 billion yuan worth of 1-year policy bank notes at a yield of 3.35 percent and 12 billion yuan worth of 3-year ones at annual yield of 3.80 percent on Friday. Eximbank of China sold 1yr and 3yrs domestic debt at 35bps and 65bps higher yields than existing offshore yields. The average difference for the last 6 months has been in the region of 40bps for 3yrs debt. Is this a sign that some policy banks will take adavatage of the yield difference to tap the offshore market? You bet. Furthermore Citic Bank sold 2yrs debt at 3.75% on Friday, the highest coupon ever paid by a Chinese Bank in recent times.
The Asiamoney Article
This is inline with my comment in April this year with Bloomberg TV
With the rising tension between China and Japan/US, not surprising European nations and European firms are likely to be the leading region adopting renminbi for international transactions
Similar to the movement in Hibor/Libor, HKD forward points have risen against USD. 1 year CNH forward points hit the widest ever today at +1615 bips. This would imply short term rates in CNH will rise. Is it all bad? For government debt markets yes as in rising forward points government securities typically will suffer while increase in aggregate balance will likely boost liquid risk asset such as spot currency and equity markets
The recent article on Asiamoney on the pace of adoption by Middle East investors there with Offshore RMB. Will this turn out to be a trend with large USD holders?? You bet its only a matter of time and size…