Ishrc � Discussion Threads

[kiwi2007] 06/1/2009 06:15

FT has something to say on corporate bonds today:

Asset managers turn to corporate bonds

By Esther Bintliff in London
Published: January 5 2009 23:37 | Last updated: January 5 2009 23:37

High-grade corporate bonds are set to outperform other asset classes in 2009, fund managers and market strategists surveyed by the Financial Times have forecast.

More than half those surveyed said high-quality corporate credit was trading at cheap levels and that this was the asset class most likely to see a rally in 2009.

In contrast, government bonds were the least-favoured asset class, with many of the 30 leading asset managers and strategists surveyed arguing that yields had plummeted too far in 2008, prompting talk of a possible price bubble.

A majority of those polled said high-quality corporate bonds had been oversold after investors had abandoned corporate credit of all grades over the past year in favour of the safest and most liquid assets, such as government bonds and gold.

Tim Bond, global head of asset allocation at Barclays Capital, said: "I like credit as an asset class the best. Investment-grade corporate bond spreads are at levels last seen in 1932, which happened to be an excellent point to buy credit – even though it was the middle of the Great Depression."

John Paul Smith at Pictet Asset Management said corporate credit offered the best potential returns while the severe global recession continued. "While we don't anticipate any immediate improvement in the economic outlook, with corporate credit yields currently at unprecedented levels, investors are being paid to wait."

Credit market prices are consistent with an unprecedented risk of default, even for the highest quality corporate bonds.

US investment-grade corporate bond prices, for example, imply a cumulative default rate of 36 per cent over five years, assuming a typical recovery of 40 cents in the dollar, according to analysts at Morgan Stanley. This is more than 7.5 times higher than the worst default rate in any previous five-year period.

The FT survey also showed growing concerns about the huge rally in government bonds, which benefited in 2008 from fears of deflation and a worldwide recession.

Mohamed El-Erian, co-chief investment officer of Pimco, said: "US Treasuries will face considerable pressure next year from the very large issuance of government paper to finance numerous public sector programmes."



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I never feel too comfortable when what seems like the whole world and his brother start recommending an asset class.

[kiwi2007] 05/1/2009 11:10

Ptolemy - these was a post on The Fool this weekend from Stokiecat:

I asked BGI about the reason for the premium in the price of corporate bond ETFs (SLXX and the like). Here is their reply:

"As per your request please note that the iShares Sterling Corporate Bond
(the "Fund") is currently trading at a premium to its net asset value
("NAV") for the following main reasons (please note that this list is
not exhaustive):

1) The underlying bonds in the Fund are illiquid. This makes the outcome
of execution in the primary market difficult to predict for the
authorised participants of the Fund. On average, execution of trades
has been at approximately 200 bps above (NAV) for the past 2-3 weeks.

2) The NAV is calculated using iBoxx prices, which are an amalgamation
of quoted prices - but not necessarily the executable prices - from
various market makers. Previously, at a time when markets were
operating more normally (i.e. before the credit crisis began), there was
a very strong correlation between the quoted prices for corporate bonds
and the price that an authorised participant would receive when they
executed the relevant trade. As a result of recent market events, there
has been deterioration in this correlation and, to some extent, the NAV
prices are not what the market perceives to be the fair "tradable"
value.

3) The market makers have taken into account the two factors mentioned
above when making their pricing, as well as when directing flow. They
have elected to position themselves in such a way that they can better
manage two way flow in the current conditions (which is, in turn,
reflected in their current pricing).

Barclays Global Investors ("BGI")/iShares has provided, and remains
fully committed to facilitating, efficient and fair pricing of its
iShares funds. BGI/iShares does not, however, seek to influence the
market in its pricing of the iShares funds."

[ptolemy] 05/1/2009 08:13

kiwi, that wouldn't be allowed.

I believe the reasons are twofold:

1. The market makers determine the prices based on demand and over the last few weeks buys have outnumbered sells by something like 25:1
2. The NAV is calculated on the mid price of the underlying and at present spreads are very wide (on some index components for SLXX it is >15%). Perhaps large investors are valuing it on the offer price since at present it is far more liquid that the underlying components.

[kiwi2007] 03/1/2009 21:25

There's been a few queries regarding the difference in price and the NAV.

I wonder if the NAV they quote is the iBOXX Sterling Liquid Corporates Long-Dated Index which I understand SLXX tracks rather than the true NAV itself? If so there are bound to be differences as the index changes each minute whilst the portfolio of bonds held only changes at month end.

[kiwi2007] 03/1/2009 20:55

Interesting article regarding SLXX on its formatiion



and lots of new year tipsters picking corporate bonds as a punt.



Telegraph tipsters also favoured them ISTR? Not sure whether that's a good sign or not?

[jonwig] 30/12/2008 11:17

I wonder if the omission of the latest dividend RNS was just an oversight on their part - they made all the previous ones, and the next is due mid-Feb.

I bought them ex-div, so the market certainly knew the relevant dates!

Also, they manage a daily RNS of the NAV, so it can't be a money-saving exercise.

[kiwi2007] 30/12/2008 10:33

Dividend information is on the ishares SLXX web page under dividends & yields... ex date was 26/11/08 .. both my Iweb and HSBC broker accounts recieved them over Xmas...

[ptolemy] 30/12/2008 08:31

It follows from what you say that it should not be possible to the Tax Man to tax it. Which is good news ;-)

Joking aside you should first ask your broker to investigate the matter and, if that fails, ask ishares to provide confirmation that the dividend was paid.

[prokartace] 30/12/2008 08:12

I have not received the divi and its going to be hard to show I should have one without the RNS

[humphbumph] 29/12/2008 11:57

You need to talk to them at ishares about the declaration of divis.

I phoned them recently to ask why the dividends for this and other ishares were no longer being declared as RNSs. I was eventually phoned back by a strange individual who did not know what an RNS was! He thought he'd heard someone else in the office mention them though!

It appears to me that the egregious Barclays Stockbrokers have, as always, culled the people who knew what they were doing and replaced them with teen-agers from other countries at half the cost who really know nothing. We may have to await future declarations but, again, as always, you can only get at them currently by digging hard into their stuff on the ishares site.

[kiwi2007] 29/12/2008 11:24

It appeared in my account over Xmas...

Dividend history and payment dates are;

24/12/08 1.8234
24/09/08 2.2062
25/06/08 2.1829
26/03/08 2.0778

24/12/07 1.7927
26/09/07 1.7720
27/06/07 1.9859
28/03/07 1.5883

[prokartace] 29/12/2008 11:23

Talking of quarterly dividends, what happened to the last one? None was declared

[borderbill] 29/12/2008 10:49

I started accumulating a position in SLXX in mid Oct and recently switched my holdings of long gilts into this (+ medium dated ILGs). I think the bull market in gilts must be close to an end but that on current spreads any rise in gilt yields should not undermine the performance of SLXX. High yield and prospects of capital gain on a one year view - a rare combination for 'low risk' (ie non equity) portfolios.

[jonwig] 24/12/2008 09:22

IBCX, I see what you mean.
Apart from the spike down earlier its performance isn't far out of line with SLXX:

[kiwi2007] 23/12/2008 22:07

EPIC:IBCX the ISHARES EUR CORPORATE BOND really flew today.. up from 113.5 to 118... not as heavily weighted in financials as SLXX but could still be a portent to a move up soon?
We should also be seeing the quarterly divi hitting accounts today / tomorrow from all the ishares corporates.

[jonwig] 22/12/2008 08:25

FT, Lex (US again but relevant):

Retail investors may have been transfixed by crashing equities in 2008. But the dramatic spread widening in corporate credit has led to some truly wild anomalies. Some of these involve derivative markets, which admittedly can be distorted by illiquidity. Even so, corporate debt spreads have now blown out to an eye-popping extent, implying cumulative default rates of 30 per cent for investment grade, according to HSBC calculations.

To put that in perspective, the default rate during the Great Depression for all corporates (including the equivalent of today's issuers of high-yield paper) was about 20 per cent. With everything that central bankers and governments are doing to avoid the catastrophic collapse in economic output of the 1930s, these yields look aberrant.


In another, more technical twist on credit pricing, one can find a company's bonds trading at wider spreads than the same company's credit default swaps – a derivative that protects investors from losses in the event of default. What this means, in effect, is that an investor could buy a corporate bond, hedge out the credit risk of the company going bust thanks to the CDS, and still make a return, as Barclays Capital has pointed out. But this may not be quite the free lunch it appears. Investors still bear the danger of counterparty risk, as there is a chance the counterparty to the CDS trade could go under like Lehman Brothers did. But it is very rare for such odd relative pricing to persist for so long.

There are reasons why corporate credit has stayed so cheap. Hedge funds and banks are deleveraging. As they do so, one of the attractions of corporate bonds – their use as collateral in exchange for cash – has waned. It is possible that more of this same deleveraging will keep credit cheap for a bit longer. But it seems more likely to believe that corporate credit is due a sustained rally. Dollar investment grade spreads have only been wider than at present once in the past 90 years and that was in 1932, which proved to be a pretty good opportunity to buy.

[kiwi2007] 20/12/2008 20:54

Cheers Jonwig - handy to know that :o)

This link's rather more from the US perspective but shows that they were moving into corporates last week;


Buyers jump into corporate and muni bonds after Fed move
6:00 AM, December 19, 2008

The Federal Reserve's move to zero on its benchmark short-term interest rate on Tuesday was the equivalent of trying to dynamite the credit crunch, to reopen routes for money to flow.

It's definitely having that effect: Some investors are rushing into parts of the credit markets where they wouldn't venture even a week ago.

"The process by which investors seek alternatives to cash has begun ... prodding investors to move out the risk spectrum" in search of higher yields, said Tony Crescenzi, bond market strategist at Miller, Tabak & Co. in New York.

That is showing up in heavy buying of exchange-traded corporate bond funds, for example.

The share price of the iShares iBoxx Investment Grade Corporate Bond Fund (ticker symbol: LQD), an ETF that holds $6.2 billion of high-quality corporate debt, jumped $2.37, or 2.4%, to $100.22 on Thursday. The fund is up 6.1% in the last three sessions, after rising 2.8% for all of November.......

[jonwig] 20/12/2008 12:09

Kiwi - worth adding a link for that:



BTW, IC is giving free access to subscriber material over the holiday, starting on 22/12.

[kiwi2007] 18/12/2008 10:55

Bond of the week, as the name suggests, generally covers individual bonds. However, this week we cast our eye over a popular bond fund, the Barclays iShare Sterling Corporate Bond ETF (SLXX).

As readers of this column will be aware, we generally prefer the "do it yourself" approach to building a portfolio. Buying individual bonds allows the investor to select his own risk profile and acquire assets with known yields and maturities going forward. A bond fund is a slightly different kettle of fish, perhaps more akin to an equity in its nature, in as much that investors buy the asset and are then dependent on the future market price to realise their investment.

Never the less, bond funds have their role to play. Investors who have smaller sums of money to work with will struggle to achieve satisfactory diversification when buying individual corporate bonds, whilst the convenience factor of being able to buy a professionally structured portfolio with one click of the mouse can not be understated.

The SLXX ETF tracks the iBOXX Sterling Liquid Corporate Long Dated Bond Index, and has 46 holdings. These range from high quality issues such as BP and Rabobank, down to credits in the mid-to-lower ranges of investment grade status, such as Xstrata and Axa. We also note the presence of some subordinated debt in the portfolio, including Danske Bank and Svenska Handelsbanken.

The main problem with this fund is the very heavy weighting towards financials. These organisations have always been substantial issuers into the bond markets and the index's make-up reflects this. Now, the SLXX is a tracker fund, and the manager has no choice but to follow the benchmark. As a result , the ETF holds 74% of its assets in financials (data to September '08). This is a less than ideal degree of sector diversification.

Structurally, the fund holds a decent range of maturities, but is tilted towards the longer end of the yield curve. The shortest bond matures in 2010, but there are some undated securities at the longer end. The average maturity is just under twelve years.

As of the 17th of December, Barclays estimate the current yield of the fund be 8.4%. Dividends are paid quarterly, a useful feature for those reliant on income from their investments. What is more, the convenient structure of ETFs allows for easy and low cost access, and the low management charge of 0.2% per annum is attractive.

Our view: Selected corporate bonds are now recovering, and in particular, the bank sector appears to off the critical list. The SLXX offers a convenient way to access this asset class for recovery into 2009 and we look for further gains next year. However, the index-tracking structure means that the fund is overweight financials and this increases the risk. With a yield of over 8%, the SLXX is tempting in these low interest rate times, but investors should be mindful of the concentration of its holdings and only apply part of their portfolio to the fund.

Mark Glowrey

[jonwig] 17/12/2008 19:29

I suppose reading articles like this makes SLXX holders feel quite warm inside ... until we remember that advisers' predictions are often way off-beam!



And tomorrow's Telegraph:

[ptolemy] 12/12/2008 08:40

Kiwi2007,
I agree with the article. I don't like treasuries at this point. I suspect for many they are a temporary flight to safety and when people start to pull money out for opportunities elsewhere, spreads will widen and a stampede will follow. On the other hand for a short term punt with falling rates, it looks like easy money if you're ahead of the crowd. If you're at the front end, you could hold for a few years to redepmtion, if necessary.

[ptolemy] 12/12/2008 08:36

Jonwig,

Your point 'not in normal times' is absolutely correct! Lehmans, Bear, AIG, Northern Rock, B&B weren't exactly junk. According to some commentators bond pricing is pricing in 17% default at BBB whereas in previous recessions it has been about 3%. My view is it only takes one to go and investors will be wary and pull funds out. I just prefer concentration to the spray gun at the moment.

[kiwi2007] 11/12/2008 23:49

Article from Time:

....So how should investors approach the bifurcated bond market? Should they run for the safety of Treasuries or consider the neck-wrenching yields now available in other sectors? Notes money manager Hartman: "From a relative-value standpoint, bonds offer an unusual investment opportunity" that he expects to pay off once the housing market bottoms and the financial outlook improves. "Investment-grade corporate bonds are very cheap, and high-yield bonds similarly offer great value at these levels," he says. Treasury bonds on the other hand, are widely viewed as overvalued on the basis of what can only be characterized as the Armageddon-anxiety rally of the past few months. They could wallop investors with losses should the economic recovery take hold next year...




In bond ETFs I also hold IBCX (iShares € Corporate Bond with it's constituents weighed rather more to large corporates than financials) and IBGL (iShares € Government Bond 15-30) at the moment... thinking of taking out the LQDE USD$ Corporate again.. did have some but sold far too early!!! Also keeping ITPS under watch (inflation could be explosive eventually?).

Any thoughts anyone?

[jonwig] 11/12/2008 15:35

Ptolemy, your remark that defaults can be expected in the index constituents is a bit surprising, given that (copied from post #24):

However, the iShares £ Corporate Bond Fund is not without its attractions. First of all, it contains only investment grade corporate bonds (those with ratings of BBB- or above), so there's no junk.

So I'd actually suspect that a stock would be removed from the index (hence the portfolio) once it was downgraded below BBB-. That would mean a capital loss on that bond, but not a total one.

We're not in 'normal' times, of course!

As for your point (2), I haven't the funds to buy just a few individual bonds, or I'd probably be following your lead.

[ptolemy] 11/12/2008 14:29

I've held SLXX for a few months. A couple of comments:

1. The spread on individual bonds varies widely over the space of a few days. so, for example a bond may trade at 82-94 one day and 86-90 the next. I think this accounts for the rather erratic progress in the price.

2. I'm taking a rather contrary view and taking the position that diversity is NOT what is best in this climate but that CONCENTRATION is the best strategy. I'm putting most of my bond money into a select group of high quality bonds. Yields are high because defaults are expected to be high and this fund just tracks an index (the chosen constiuents are not managed). Some of the constituents will go under IMO.

Either bonds are extremely undervalued or bond spreads are reflecting that defaults will be high. The rather laboured progress of SLXX (compared with my portfolio) suggests to me there are some laggards in the SLXX portfolio. The ailing gazelles will be picked off by the approaching tigers..

Just some thoughts.