fourth quarter 2010 gtaa fixed income
TRANSCRIPT
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o a ac casse oca on
GTAAFixed Income
September 20th, 2010
Damien Cleusix
Clue6 Fourth Quarter 2010
am en c ue .com
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1Executive SummaryFixed Income
US Government bonds are not a bubble. They are probably not a good B&H investment but they are behaving rationally.
They correlation with nominal GDP growth will continue to rise as long as the economy will be in a balance sheet recession
with deflation showing its ugly face on every slowdown...
Yields have resumed their downtrends as expected when the leading indicators started to soften. As with equities, the business
cycle will rule.
On the inflation/deflation debate we did not have the feared short-term inflation scare that would pave the way to a new wave
of deflation and, further down the road, inflation or more. Emerging market are experiencing one (food price inflation and its
social consequences) and, as in 2008, will force authorities to tighten precisely at the wrong time.
Careful analysis of government and Central Banks words and acts will be needed as there remain a risk that they will try toinflate the problems away more quickly than anticipated. QE2 might be soon a reality and while its effectiveness in pushing rate
lower is still to be proved, if it does it could be the trigger to a new round of competitive devaluation around the world (which
ironically will push US government bond yields lower and ).
On the potential of QE2 to solve the challenge facing the US economy (and similar policies elsewhere) our response is a
categorical no for economies in the middle of a balance sheet recession. Fiscal policies yes, monetary policies no (but one has to
remember that the Fed, when it guaranteed and bought GSE MBS, was in fact making an unconstitutional fiscal policy, not a
The fact that AUSTERITY is on every politicians mouth seems to strengthen the case for deflation now and inflation laterin
desperation.
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Corporate and Emerging market bonds spreads have contracted in the past few weeks . Dont be fooled, while spreads
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2Executive Summary
seems to have some room to fall further, absolute yields are almost at historic lows. Both high yield and emerging markets
bonds are yielding less today than at the high of the credit bubble in 2007 . Beware
Sentiment analysis is inconclusive for government bonds after having showed signs of short-term excessive optimism in
August. While we are seeing excess on the corporate and sovereign high yield (not so high yield) space.
On the liquidity side, banks and public demand should be more than sufficient to absorb public issuance, for now. Refinancing
needs at the high yield corporate, banks and emerging markets side are likely to pose a much greater risk in the futureut compan es countr es ave are pro t ng rom t e current nvestors t rst or y e s to re nance an engt en t e
duration of their repayment schedule. While many emerging markets are in much better shape than 10-15 years ago, they still
remain dependant on flows from the US, Europe and Japan. Furthermore never underestimate the power of crowd dynamic in
this area of the market. Stress in Eastern Europe or inside the EU will have dramatic domino effects especially when, as we have
, .
This will provide a fantastic buying opportunities. If you have to be long or if you can do relative value, favor operating
leveraged against financially leveraged countries.
Seasonality is still favorable for government bonds and negative for more risky bonds.
The trend of the US, Euro and UK government bonds markets is unequivocally down (for yields). Yields have pulled backto well defined resistances where we would be buyer on weakness (yield weakness) or on further strength. We are seller of
covere ups e pr ce vo at ty on excess ve pr ce strengt .
Corporate and emerging market bonds trends are rising. We prefer to be on the sideline. Remember that it is sometimes
better to be out of the market wishing to be in than in the market wishing to be out.
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Sometimes less yield is better.
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3Bonds: ValuationsChart 1
Forecast (July)
Source: GMO
We still do not think that US government bonds are a bubble. They are clearly a poor long-term investment (Chart 1) but they are behaving
rationally given the nominal growth prospects. Yields will continue to follow the ebb and flows of leading indicators and 10 years yield will decline
much below 2% before we have a real inflation scarce.
There will be a time when one will have to worry about inflation as government spending continue to grow and new stimuli will have to be
voted in the next few years but we are still in a deflationary environment whose existence has now become apparent even if commodities
have yet to fall.
The huge pick up in the monetary base has not resulted in an increase of credit (money multiplier collapsing). Capacity utilization is low, wages
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should continue to have a moderating effect,
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4Bonds: Default HistoryTable 1
Chart 2 Moodys US Investment Grade default Rate Investment Grade 5 Years Default Priced
by the CDS Market
Source: Bloomberg, Clue6
Investment Grade default risk priced by the CDS market is still high if one look at the historical 5 years cumulative default. 103 bps with a 30%
recovery rate imply a 6.8% 5 years cumulative default which is higher than the 4.5% reached in the 30's.
Source: Moodys, Clue6
But when one look at the level of indebtedness and the fact that we might experience (this is our main scenario as you know) some quarters of
negative NOMINAL growth in the 3-18 month to come, there is room for yields to widen a bit. Note also that leases will have to be capitalized in
the balance sheet according to a new FASB proposal. This will increase, substantially for some sectors, their absolute and relative (debt/equity)
indebtedness.
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Lastly if one look at absolute yields, there is nothing to be exited about. We prefer to buy high quality high dividend paying stocks. You have
an implicit inflation hedge and the capital gains prospects are larger
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5Bonds: Default HistoryTable 2
Chart 3 Moodys US Speculative Grade default Rate High Yield 5 Years Default Priced by the
CDS Market
Source: Bloomberg, Clue6
High yield and emerging markets default risk priced by the CDS market has decreased substantially . 544 bps (for the US high yield bonds)
Source: Moodys, Clue6
w t a 30% recovery rate mp y a 31.2% 5 years cumu at ve e au t w c s ower t at t e 2 prev ous pea s sprea s wou nee to w en y more
than 100 bps) and much lower than the peak in the 30s (spreads would need to widen by more than 400 bps).
The problems identified for investment grade bonds apply here too.
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6Bonds: Default History
Source: Moodys, Clue6
One should keep in mind that the percentage ofhigh yield bonds issued near the end of the credit bubble in 2007 which were rated Caa and
below was the highest in history.
Those bonds have a very high default propensity (not that the chart above is not 5 years cumulative default as the previous ones but yearly default).
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This time it wont be different.
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7Bonds: FundamentalsDevelo ed Economies Nominal Interest Rates and Develo in Economies Nominal Interest
Chart 5Chart 4
Growth Rate Relationship
Rates and Growth Rate Relationship
Source: UBSSource: UBS
We have demonstrated in the past that the US 10 years government bond yields levels and change have a high correlation with the GDP
nominal growth.
On the charts above one can see that it is true for developed economies in general (Chart 4) but it is not the case for developing economies (Chart 5).
The graphs are calculated comparing 20 years nominal growth rate to the 20 years average nominal rates.
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8Bonds: FundamentalsJa an Avera e Nominal Growth and 10 Years Ja an OECD Trend Restored Leadin
Chart 7Chart 6
Government Bond Yield
Indicator and 10 Years Government Bond
Yield
On chart 6 one can see the relationships between Japanese nominal GDP growth and nominal 10 years yields. Note the downside acceleration
Source: OECD, Clue6Source: BOJ, Clue6
when YoY growth move below 0.
The lower the average nominal growth, the more sensible yields become to the macro cycle . Ten years yield are topping at the same time as
leading indicators (chart 7)
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9Bonds: FundamentalsUS Avera e Nominal Growth and 10 Years US OECD Trend Restored Leadin
Chart 9Chart 8
Government Bond Yield
Indicator and 10 Years Government Bond
Source: Federal Reserve, Clue6 Source: OECD, Clue6
.
If those were the only things to think about, forecast would almost be easy but
you have to add the current real debt burden and the banking crisis/debt crisis historical relationships which should eventually lead to a rapid
structural move u in ields our central case is that this is not et somethin eo le should worr about for the US at least
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10Bonds: FundamentalsFiscal Imbalance as a
Chart 10Table 3 US Government Debt to GDP Ratio
Percentage of GDP (2004)
It is not the towering sail, but the unseen wind that moves the ship.
Source: Measuring the Unfunded Obligations of European Countries J. Gokhale Source: Federal Reserve, Clue6
Dont be fooled, when the public realize that they will never get what they have been promised, behaviors will change and this is not going
to be good for growth and risky assets.
On chart 10 one can see a debt to GDP ratio for the US including state and local debt and GSE debt (if you want to know why the GSE are
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, .
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11Bonds: Fundamentals
Source: M. Reinhart and K. Rogoff
note.
Banking crisis are expected to be followed by debt crisis with a lag as the fiscal costs ultimately overwhelm the capacity of affected countries to
repay their foreign owned debt.
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So be prepared for sovereign stress to continue and dont chase yields where risks are too high. The most successful investors are those who do
not lose money.
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12Bonds: FundamentalsGreece CDS Im lied Default Probabilit assumin 60% S ain CDS Im lied Default Probabilit
Chart 12Chart 11
recovery rate) (assuming 60% recovery rate)
Among the developed economies, the day of reckoning will hit Europe first (Japan should be monitored attentively too).
Source: Bloomberg, Clue6 Idea: P. Schwartz Source: Bloomberg, Clue6
s one can see, e uropean nanc a a y ac y announcemen as ecrease e mar e pr ce pro a y o a e au n e
short-term for countries like Greece and Spain (Chart 11-12) but the long-term probability have increased.
As said when the announcement was made, we find it easy to promise money to bail out a country when one believe that we will never have to bail
one out but what happen if countries have to be bailed out (Greece is manageable but Spain isnt, Greece, Portugal and Ireland together barely and
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w o rea y n e om nos w s op o a . e en resu s a p ung ng uro an en a sappear ng one , e res ruc ura on an ra ca y
lower standard of living in most countries (and dont expect the masses to stay quite)
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14Bonds: SentimentChart 14Chart 13 TLT and Conference Board Interest Rate Survey Strategists Bond Allocation
A net 30% of people surveyed by The Conference Board are expecting rates to rise in the next 12 months (Chart 13). As one can see they were
Source: Bloomberg, Clue6Source: Conference Board, Clue6
most bullish at the start and end of 2008 just when yields were making lows. We are still far away from levels where we would rate optimism
exuberant
Strategists have sharply lowered their recommended allocation to bonds since the start of 2009 (Chart 14) but we are probably near the bottom
of a new range.
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15Bonds: SentimentJP Mor an Treasur Investor all
Chart 16Chart 15 ML Fund Managers Survey on US Bonds
Clients Net Long Survey
Source: Merrill Lynch
A net 25% of managers pooled by Merrill Lynch are underweight bonds (Chart 15) and more than 60% are expecting long-term rates to be
Source: Bloomberg, Clue6
g er n mon s.
JP Morgan Treasury Investor Sentiment all Clients Net long survey (% net long - % net short) is just shy of 10 (Chart 16).
Note that the clients surveyed have been more often right than wrong at turning points
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16Bonds: SentimentTLT and R dex Short US
Chart 18
Government Bonds Funds AssetChart 17 US Long Bond Future and its Put Call Ratio
The Long Bond future PC ratio is low and thus not as supportive as it was in the past few months (Chart 17). It should even be rated as bearish .
Source: Rydex, Clue6Source: Bloomberg, Clue6
Assets in the Rydex Short Government Bond funds have decreased substantially but this is due to the underlying performance rather than net
funds selling (Chart 18).
Note that the last time we really had net selling despite yields falling was at the 2007 ten years treasury yields top.
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17Bonds: SentimentChart 20 HYG Shares OutstandingsChart 19 TLT Shares Outstandings
TLT shares outstandin have been risin ver ra idl durin the recent correction chart 19 . Similar frantic bu in have been usuall
Source: Bloomberg, Clue6Source: Bloomberg, Clue6
witnessed at bottoms.
HYG shares outstanding have also been increasing at a very rapid pace (chart 20). They have not declined during the last correction as they
have in the past. Feels like too much money pouring in and the rest of our analysis is giving the same impression By the way corporation have
noticed and are ivin investor what the want a er.
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18Bonds: SentimentUS 10 Years Treasur Yields and Tbonds Commercials US 10 Years Treasur Yields and 10 Years Tresur s
Chart 22Chart 21
and Non Reportable Net Future Position
Commercials and Non Reportable Net Future Position
Commercials are now net shorts Tbonds for the first time since the middle of 2008 (Chart 21) while non-reportables are net long. Commercials
Source: Bloomberg, Clue6Source: Bloomberg, Clue6
ave s or ca y een e smar money u ey can e wrong as ey were e ween - . e w s ar o worry e pr ce ren e er ora e
and the commercials/non-reportables configuration remains the same.
Both commercials and Non Reportable have sharply decreased their net position on the 10 years treasury(Chart 22). Commericals remain net
long while non-reportables have switched to a net short position. Yields have had a tendency to start meaningful decline when both have
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19Bonds: Sentiment Smart MoneyUS Government Bonds 10 + Total Return and Wasatch- ML Hi h Yield Master II and Loomis Sa les
Chart 24Chart 23
Hoisington US Treasury Beta Exposure
Institutional High Income Beta Exposure
There are many good bond investors but there are 2 which consistency has always fascinated us .
Source: Clue6Source: Clue6
On Chart 23 one can see that V. Hoisington has decreased its exposure to the US long bonds on the recent rally. It still remains at the top of its
pre2009 range.
D. Fuss has been a buyer on the most recent decline (Chart 24). Its exposure is in the middle to upper of the historical range.
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20Bonds: LiquidityGovernment Bonds as a Percenta e of Commercial
Chart 26Chart 25 10 Years Treasury and Yield Curve
Banks Total Assets
There are many investors worrying about who will be left buying the bonds issued by the US Treasury (and others finance ministries around the
Source: Bloomberg, Clue6Source: Federal Reserve, Clue6
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2.5x the public one in the US) but there are potentially huge pool of demand.
Commercial banks will probably increase dramatically their Treasury investment (Chart 25), both because they will have to (new regulations)
and because they will us the carry between long and short rate to build up capital at low risks (Chart 26).
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This is what happened in Japan and in other countries (US included) in past similar configuration.
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21Bonds: LiquidityChart 28Chart 27 ICI Bond Mutual Fund Assets and Net Cash FlowUS Households Net Buying of Treasuries
Households will also continue to reallocate toward fixed income investments as we demonstrated in 2007 (Chart 27) Only 9-10% of their assets
Source: ICI, Clue6Source: Federal Reserve, Clue6
are in fixed income securities Retiring boomers will see more attraction in stable cash flows as opposed to capital gains (and they haven't
made a dime on this in the past 12 years...)
Fixed income mutual fund buying (Chart 28) has been concentrated in the corporate bonds mutual funds demand will slowly be moving toward
government bonds now that yields have been rising and corporate spreads declined
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22Bonds: Liquidity
Source: Mirae Asset Management
If we take the 1989-1994 cycle has a model, the private domestic sector should buy usd 6.3 tn. Until the end of 2013, more than the usd 5.5 tn.
budget deficit projected and we believe that they will buy substantially more
Something to keep an eye on in the short/medium-term is a potential resurgence of private sector credit demand. The stock private sector
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23Bonds: LiquidityChart 30Chart 29 US TIC Data10 Years Treasuries and Bids
What about foreign demand.
When bu in treasur bonds forei ners have four main variables to consider. First the level of the ields then the relative valuation of the USD the inflation ros ects
Source: Bloomberg, Clue6Source: Clue6
and finally the alternatives.
US long yields are higher than in Europe and Japan while the currency is significantly undervalued. With regard to the inflation variable The Fed has been somehow more
aggressive than the ECB and the treasuries has put a lot of guarantees everywhere which are likely to end up being very costly but the next phase of the economic stress might be
centered in Europe and as such the ECB will have to be aggressive too. Remain the alternatives. Seems that there will be less concurrence from European sovereign bonds in the
medium-term The last alternative is the creation of larger bond markets in various emerging market regions this will happen but slowly so no real influence for now
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Note that foreigners have started to buy corporate and Agency bonds again (Chart 30).
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24Bonds: LiquidityChart 31Table 4 Bonds Funds Net Flows QTDBonds Funds Net Flows
Source: BoA, Lipper/AMG, Clue6
Source: BoA, Lipper/AMG, Clue6
oo ng at net n ows nto on un s, one can see t at ore gn on s rema n very popu ar ta e an art anot er s gn o extreme
negativism toward the USD).
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25Bonds: Liquidity RefinancingChart 33Chart 32 US High Yield and Leveraged Loans Maturity Schedule EUR High Yield and Leveraged Loans Maturity Schedule
We have been talkin a lot about the refinancin roblematic since last autumn It is oin to be HUGE. Soverei n hi h ield cor orate
Source: BarclaysSource: Barclays
bonds, leveraged loans (Chart 32 and 33),
Banks have also huge refinancing ahead and they have an historic low average maturity for their debt. European banks needs more than eur
700 bio. by the end of 2013 to roll over and pay interest on their debt . What if they are starved of short-term funding Basel III was a relief as
re uired covera e ratios were below the lowest forecasts a relief for banks but not for tax a ers down the road .
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26Bonds: Liquidity RefinancingChart 35Chart 34
Schedule: Current vs. Historical
Current vs. Historical
Source: MLSource: ML
We have also noted that the maturity length has been declining in the past 5-6 years, notably in the leveraged loan sector.
This can be clearly seen on the chart 34 and 35.
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27Bonds: Liquidity RefinancingChart 36 CMBS Maturity Schedule
Source: Deutsche Bank
An ere one can see w at CMBS maturities oo e
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B d i idi
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28Bonds: LiquidityEmer in Markets Bonds uarterl BondUS uarterl Hi h Yield Bond
Chart 38Chart 37
Issuance (US bn.)
Issuance (US bn.)
But one also has to take into account the huge issuance of fixed income paper which has, as will be shown on next page, been mainly used torefinance existin debt.
Source: Bloomberg, Clue6Source: Bloomberg, Clue6
On Chart 37 and 38 one can see that there is as much junk bonds being sold today as during the heyday of 2007 while emerging markets bonds
issuance is making records after record.
Our uess is that investors will re ret their thirst for ields
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Bonds: Li idi R fi i
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29Bonds: Liquidity RefinancingChart 40Chart 39 2010 First Half High Yield Issuance Purpose
Refinancing and Maturity Schedule
Source: Morgan StanleySource: Moodys
Moodys has estimated that up to 64% of the first quarter high yield issuance (and even more in 2009) has been used to refinance debt and
extend maturity c art 39 .
This has pushed backward the refinancing time bomb we have been discussing in the previous pages (chart 40).
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Bonds: Li idit R fi i
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30Bonds: Liquidity RefinancingChart 42Chart 41 Europe Bonds Net Issuance Calendar Eastern Europe External Flows
As one can see, the refinancing issue is not limited to corporate but also sovereign bonds.
Source: IMF
Source: MS
Where will the money come from? We do not know Expect higher real yields, higher spreads and much more bankruptcies than currently
discounted by the market. Watch for failed auctions as catalysts.
This is going to be THE ISSUE in the next 2-3 years and remember that government can not afford this inevitable crisesWe will have time to
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wr te muc more a out t s ssue ater
31Bonds: Q tit ti E i 2
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31Bonds: Quantitative Easing 2
Fed buys Treasuries
US Back end of the Treasury curve falls
US Dollar fallsUS Mortgage prepayment rise if
Fed MBS holding fall
Foreign Central banks buy USD to
weaken/limit the rise of their own
currenciesUS Government Yields fall
Source: Clue6
Intervention proceedsinvested in Treasuries
Gold bugs surely hope the Fed will embark on QE2
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32Bonds: Breadth
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32Bonds: BreadthChart 44Chart 43 Investment grade Cumulative Advance-Decline Line High Yields Cumulative Advance-Decline Line
Source: IMF
Source: MS
The high yield and investment grade bonds US advance-decline line is still in synch with the markets.
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33Bonds: Breadth
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33Bonds: BreadthChart 46Chart 45 High Yield Bonds Fosback High-Low Index High Yield Bonds New High as a % of Total
Source: IMF
Source: MS
.
But note that the high yield indices are making new highs at the same time as the % bonds making new highs is declining (Chart 46). It is hovering
just above the 5% zone where high yield bonds indices have tended to suffer.
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34Bonds: Seasonality
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34Bonds: SeasonalityUS hi h Yield Bonds TRUS Treasur Bonds 7-10 ears TR
Chart 48Chart 47
Seasonality (since 1990)
Seasonality (since 1986)
Source: Clue6Source: Clue6
.
High yield bonds seasonality pattern is similar as the stock market (Chart 48).
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35Bonds: Intermarket
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35Bonds: Intermarket
10 Years yield have a tendency to fall when 5 year forward 5 year real yield rise above 2.5%. Well it worked again, like a charm and we are
creaping back to those levels
The ECRI, other leading indicators and J. Hussman recession models remarks made in the equity section have the opposite implication for bonds.
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- . , ,
paribus seems far fetched for Europe, the UK and ultimately Australia.
36Bonds: Demographic
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36Bonds: DemographicChart 49 10 Years Treasury Yields and Demography
Source: Emphase Finance
We w wr te more a out t s n t e uture ut su ce to say t at pure y emograp c mo e s are not avora e or on y e s
The proportion of retirees will rise faster than those saving a lot
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37Bonds: Graphs
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37Bonds: Graphsears overnment on e
Shoulder
Shoulder
Shoulder
Shoulder
Head
Head
There were a lots of talks about a potential inversed Head & Shoulders secular bottom in the 10 years US yield. This was also the case in 2005 .
We are still in a secular bull market, make no mistake. There will be time to get structurally bearish but not now
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38Bonds: Graphs
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38Bonds: Graphs
Ten year yield are pulling back to the 2.8-2.9 resistance where some demand should reappear.
While there were many sign of short to medium term excesses in mid-August most have been corrected since.
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e are ac ca y uyer reasury uyer on a mover e ow . or on a move o . - . .
39Bonds: Graphs
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o ds: G ap sEuro 10 Years Government Bon Y e
We would avoid European bonds for now.
For the pure technician we are at resistance and we would be buyer on a move below 2.35 or in the 2.65-2.8 range.
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40Bonds: Graphs
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p
UK 10 Years Government Bon Y e
We have said since 2007 that the UK would face a very serious fiscal crisis which would potentially need the intervention of the IMF. We still
believe it. Lets see how it copes with a rapidly falling residential real estate market in the next 6-24 months.
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41Bonds: Graphs
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p
ares oxx g e orporate on un
Moodys BAA Yields
The trend is up but
Do not forget that while spreads have yet to reach historic lows, absolute yields are at secular lows.
Do ou feel ou are com ensated for the risks? We do not. This can be frustratin to sta out at this uncture but the reward reserved cash to
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buy at much wider spreads and fatter yields) is worth the discomfort.
42Bonds: Graphs
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p
ares organ merg ng ar ets on un
ML Emerging Markets
Sovereign Plus Yields
There will be great opportunities coming but now we want to continue to observe the market from the outside.
We know that there will be better opportunities when we hear people talking about the fantastic opportunities in Ghana domestic bonds yielding 5
and something percent.
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When time comes and the baby is thrown with the bath water we will be heavy buyers as we have sometimes in the past.
43Bonds: Conclusion
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US Government bonds are not a bubble. They are probably not a good B&H investment but they are behaving rationally. They correlation withnominal GDP growth will continue to rise as long as the economy will be in a balance sheet recession with deflation showing its ugly face on every
slowdown...
Yields have resumed their downtrends as expected when the leading indicators started to soften. As with equities, the business cycle will rule.
On the inflation/deflation debate we did not have the feared short-term inflation scare that would pave the way to a new wave of deflation and,
further down the road, inflation or more. Emerging market are experiencing one (food price inflation and its social consequences) and, as in 2008,
w orce au or es o g en prec se y a e wrong me.
Careful analysis of government and Central Banks words and acts will be needed as there remain a risk that they will try to inflate the problems
away more quickly than anticipated. QE2 might be soon a reality and while its effectiveness in pushing rate lower is still to be proved, if it does it
could be the trigger to a new round of competitive devaluation around the world (which ironically will push US government bond yields lower and
.
On the potential of QE2 to solve the challenge facing the US economy (and similar policies elsewhere) our response is a categorical no foreconomies in the middle of a balance sheet recession. Fiscal policies yes, monetary policies no (but one has to remember that the Fed, when it
guaranteed and bought GSE MBS, was in fact making an unconstitutional fiscal policy, not a monetary one)
The fact that AUSTERITY is on every politicians mouth seems to strengthen the case for deflation now and inflation laterin desperation.
Corporate and Emerging market bonds spreads have contracted in the past few weeks . Dont be fooled, while spreads
, .
today than at the high of the credit bubble in 2007. Beware
Sentiment analysis is inconclusive for government bonds after having showed signs of short-term excessive optimism in August. While we
are seeing excess on the corporate and sovereign high yield (not so high yield) space.
Clue6 Fourth Quarter 2010
44Bonds: Conclusion
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On the liquidity side, banks and public demand should be more than sufficient to absorb public issuance, for now. Refinancing needs at the highyield corporate, banks and emerging markets side are likely to pose a much greater risk in the future but companies/countries have/are
profiting from the current investors thirst for yields to refinance and lengthen the duration of their repayment schedule. While many
emerg ng mar e s are n muc e er s ape an - years ago, ey s rema n epen an on ows rom e , urope an apan. ur ermore
never underestimate the power of crowd dynamic in this area of the market. Stress in Eastern Europe or inside the EU will have dramatic domino
effects especially when, as we have documented in the past, more than 70% of the loans to emerging markets have been made by European financial
institutions.
s w prov e a an as c uy ng oppor un es. you ave o e ong or you can o re a ve va ue, avor opera ng everage aga ns
financially leveraged countries.
Seasonality is still favorable for government bonds and negative for more risky bonds.
, .
resistances where we would be buyer on weakness (yield weakness) or on further strength. We are seller of covered upside price volatility on
excessive price strength.
Corporate and emerging market bonds trends are rising. We prefer to be on the sideline. Remember that it is sometimes better to be out of the
.
Sometimes less yield is better.
Clue6 Fourth Quarter 2010