Ishrc � Discussion Threads

[jimbox1] 21/1/2009 08:30

Bring on the Quantitative Easing!

[kiwi2007] 20/1/2009 22:59

Don't suppose he'll be buying SLXX but surely it ought to be positive news?

Bank of England to buy up corporate bonds
By Chris Giles, Economics Editor

Published: January 20 2009 20:27 | Last updated: January 20 2009 20:27

The Bank of England will start to buy corporate bonds in large quantities within weeks, Mervyn King, its governor, said on Tuesday night as he explained the next steps to be taken to limit the severity of the recession.

Borrowing from Donald Rumsfeld, the former US defence secretary, he said such purchases would be "unconventional unconventional measures" designed to increase liquidity and trading and reduce the spread of corporate bond yields over government bonds.

These differed from "conventional unconventional" policy, in which the Bank created money to buy assets with the aim of increasing the stock of money in the economy and the availability of credit while also raising spending. Although the Bank's monetary policy committee was not ready to use this weapon yet, he said, if inflation was likely to remain too low the MPC "might wish to adopt these unconventional measures as an instrument of monetary policy".

Speaking to employers at a CBI dinner in Nottingham, Mr King followed the prime minister's lead in turning up the heat on the banks. He insisted that all the official efforts to restore health to the banking system "are not designed to protect the banks as such. They are designed to protect the economy from the banks."

"A pronounced contraction in spending and output is under way," he added, predicting "in the first half of this year, the rate of contraction is likely to continue to be marked".

The banks needed to reduce the size of their balance sheets, but he insisted this reduction should not come at the expense of lending to non-financial companies and deepening the recession. Instead, he hoped banks would reduce their loans to other parts of the financial system.

"There is scope for a reduction in the leverage of banks without restricting lending to the 'real' economy," he said, insisting that the necessary "netting" of exposures needed to take place in an international setting, since many of banks' assets and liabilities were foreign.

Mr King acknowledged that recent policy from the authorities had appeared contradictory, with officials urging banks to reduce the size of their balance sheets while continuing to lend freely. Consumers had been urged to spend while encouraged to reduce their dependence on debt. "Almost any policy measure that is desirable now appears diametrically opposite to the direction in which we need to go in the long term," he said.

Unusually for the Bank governor, he even came close to a mea culpa, for policy mistakes the Bank had made. "It is clear that policy did not succeed in preventing the development of an unsustainable position."

But this failure was more one of circumstance than one of error in setting interest rates, he continued. To prevent the build-up of credit while inflation was under control in future, Mr King called for the Bank to be given "an additional policy instrument to stabilise the growth of the financial sector balance sheet".

[jonwig] 20/1/2009 12:12

Thanks for that, Alun.

However, another scenario presents itself after yesterday's events: a run on sterling and a rise in gilt yields across the 10+ year spectrum.
Unless the CB risk premium falls, CB yields may need to rise, too.

[alun rm] 20/1/2009 12:07

I had drinks with an old friend last night who manages a medium sized hedge fund.

Asking him about the year ahead, he suggested that corporate bonds would probably start to rally from March. His reasoning was that just as things started to get going pre-Christmas, Madoff threw a spanner in the works. This has led to more redemptions and further forced selling by funds, delaying the rally by a few months.

I asked him what he thought would happend to bank debt if the banks were nationalised. He suggested that the government would have to honor the debt, or risk a systemic collapse that would be disasterous for the UK. But he thought that a likely scenario would see bond holders being paid back at a percentage below par. Perhaps at 90 or 95.

Given that SLXX is widely well spread around (with no RBS I might add) this would mean that the fund would be unlikely to be badly hurt, even if Barclays adn Lloyds end up in the public sector.

Of course, banks in trouble is very bad for sentiment, hence the recent falls. But I would suggest that SLXX is still a sound investment, safer than equities at this time. However, yields will probably increase in the near term as the banks report record losses and go cap in hand to their governments.

Eventually, when this all unwinds, the yield will look attractive, but I am affraid holders will have to be very patient. We could be trading between 100 and 110 for the next few weeks.

[jonwig] 20/1/2009 07:24

NAV (19/01) 108.1947, vs 109.4773 (16/01) and 110.0897 (15/01).

I suspect bank CBs are simply doing what's expected of them.

[badtime] 19/1/2009 20:42

all tht long dated gilt stuff to hit the markt?...Worries of inflation long term?...no idea.

[kiwi2007] 19/1/2009 18:16

Big falls in the longer end of corporate bonds and gilts denominated in GBP today. Unfortunately that's what SLXX tends to hold.

Why the fall at the longer end? Hopefully someone clued up will pop in and explain.

[borderbill] 19/1/2009 10:00

"Bank of England asset purchase facility. As a further step to increase the availability of corporate credit, by reducing the illiquidity of the underlying instruments, the Bank of England will set up an asset purchase programme implemented through a specially created fund. The Bank will be authorised by the Treasury to purchase high quality private sector assets, including paper issued under the CGS, corporate bonds, commercial paper, syndicated loans and a limited range of asset backed securities created in viable securitisation structures. The Treasury will authorise initial purchases of up to £50 billion, financed by the issue of Treasury bills. Given the scale of the programme, the Bank will be indemnified by the Treasury. This programme will come into effect from 2 February."


Will this include the constituents of SLXX ??!!

[borderbill] 19/1/2009 08:34

Bill Gross & Pimco are a class act, his monthly note on the pimco website is compulsory reading.

[borderbill] 18/1/2009 14:59

The weekend press is worrying about SLXX in some respects (Banks going from bad to worse and lots of banking exposure in SLXX) but positive in others (the rumoured Govt guarantee of (aspects of) their debt issuance. It coudl be an interesting week.

[jonwig] 15/1/2009 10:05

Interesting that this morning's NAV is £110.023 vs £109.5104 yesterday, but the share price is falling.

It could be simply a matter of rebasing the share price to the NAV and erasing the premium.
Can't be helped, but it wouldn't be too pleasant if we went to a 2% discount!

[morgs] 13/1/2009 10:19

Green Shoots or Shoots Green, you decide?



Corporate bonds find hope from new issues
By Aline van Duyn, Michael Mackenzie and Nicole Bullock

Published: January 8 2009 02:00 | Last updated: January 8 2009 02:00

Improved sentiment in some parts of the corporate bond market has led to a flurry of bond issues in the first days of 2009, with investors ranging from traditional bond holders to equity buyers seeking high-quality debt with juicy yields.

Many analysts and investors have recently struck a bullish note about good quality corporate bonds, highlighting them as an attractive investment relative to buying shares in the same company. Historically low yields in government bonds are also encouraging some investors to seek higher-yielding options.

"What we're witnessing is a classic case of supply versus demand," said Richard Cheng, portfolio manager at TIAA-CREF, an asset manager with nearly $400bn under management. "Many investors are awash with cash as they enter 2009. This has resulted in a rally in credit."

As bad as things may get for the economy and companies this year, the argument is that credit spreads more than reflect a big increase in defaults - and investment-grade bonds in particular are widely recommended.

US investment-grade spreads have tightened since mid-December when they were quoted at a record peak of 578 basis points over US Treasuries, according to Standard & Poor's. In 2008, spreads widened from 204bp to 523bp. They were recently about 513bp.

The improvement in spreads is being followed by a burst of new issuance, although investors are still demanding high risk premiums.

Beyond debt guaranteed by the Federal Deposit Insurance Corp - which has become the main way for hard-hit financial institutions to raise funds - investment-grade companies have sold more than $17bn in bonds in the past few days, according to Barclays Capital. About a dozen other new deals are also already in the market, syndicate officials said.

The picture is similar in Europe. National Grid, the UK company, reopened the European corporate bond market this week, encouraging a flurry of other European companies, including VW, Gaz de France and Schneider Electric, to come to market.

Continuing the pattern set in the last part of 2008, credit in the US is only available to certain corporate borrowers. "Right now, it's a 'have' and 'have-not' market," said Mark Bamford, head of syndicate at Barclays Capital. "But as confidence continues to return, investors will begin to look further down the credit spectrum."

The issuance calendar is skewed to highly rated companies in predictable businesses such as utilities and telecoms, such as this week's $1bn offering from PacifiCorp, an electric utility whose parent is controlled by Berkshire Hathaway.

Perhaps the most notable issue has been General Electric Capital's $4bn of 30-year bonds.

GE Capital, like other financials, has been issuing shorter term debt that is guaranteed by the FDIC. GE Capital's sale of 30-year bonds was the first issue of non FDIC-backed debt by a financial since American Honda in September, according to Bank of America. Still, the AAA rated GE Capital could only sell the bonds at a hefty 400bp over 30-year Treasuries, a premium of close to 100bp to where its bonds traded in the secondary market.

For now, many financials are unlikely to emulate GE Capital, as banks face more writedowns from housing and consumer related debts. Indeed, the performance of financial institutions will continue to have a large effect on overall corporate bond returns, as they represent more than a quarter of -outstanding bonds and hence a quarter of the main indices that track company debt.

In spite of the current rally in credit, the move lacks momentum that in the past came from leveraged investors, notably hedge funds. Faced with redemption requests and tougher borrowing constraints from an embattled banking sector, hedge funds are not in a position to jump on a credit rally .

"High-grade corporate bonds are starting to attract buyers," says John Higgins, analyst at Capital Economics. "Nonetheless, a more substantial contraction in credit spreads is unlikely to materialise until there are clear signs that the deleveraging process has run its course."

For now, the buyers are investors who are attracted to yields without the enhancement of leverage (which can amplify returns). These are traditional buy-and-hold investors, such as money managers and pension funds. But liquidity, and especially the ability to sell bonds at a future date, is very much reduced.

"Liquidity is still exceptionally poor," said Mr Cheng. "The rally was technical. Over the short term, it may continue. Over the longer term, we are more cautious."

There are also fundamental concerns over the extent of damage to corporate earnings from the credit crunch. Even large-scale government fiscal spending and aggressive monetary policy actions are unlikely to have prevented damage to the real economy. Companies are only now starting to report earnings for the fourth -quarter.

Meanwhile, conditions in the broader corporate bond markets remain far from normal. Junk-rated companies face a continued credit crunch and bankruptcy filings are happening daily. S&P's speculative grade index is currently around 1,600bp (the spread over Treasuries), down from a record wide of 1,754bp in December.

Only if the investment grade sector improves is there any expectation of better credit availability for high-risk companies whose ratings are classified as "junk".

Also, as long as banks are having to pay more for longer-term debt than the companies to which they could lend, the availability of credit from banks will remain limited.

"Any sustainable recovery in high yield will likely be dependent on the resumption of functioning markets in investment grade financials," say analysts at Merrill Lynch.
Copyright The Financial Times Limited 2009

[erpetao] 12/1/2009 13:05

Hi Jonwig

Yes, I've read a couple of articles about the bubble in govt stock. And this one now has an attractive price and yield. I calculated the yield using last year divindends (not perfect, I know) and it gives me around 7.4% at current price.

Planning to hold on these for a while, maybe until I see clear recovery on the FTSE (a year, two, three.. who knows?), and then I'll consider moving to ISF.

[jonwig] 12/1/2009 12:42

Hi, erpetao.

Yes, I added this morning. There's a massive excess of buys over sells here today.
That won't have any effect, though, unless money is going into funds which will use it to buy CB, or into CBs directly.

The 'bubble' in govt stock is driven more by fear than greed - current buyers know they will sell at a loss. Once govt stock gets sold through more appetite for risk, much of it should move to investment-grade CBs. And bank shares seem to be recovering, which should help financial CBs in particular.

So I feel fairly confident, but it would be nice to see a measurable price improvement here ... say to £120.

[erpetao] 12/1/2009 12:30

I bought these today for my ISA.

[jonwig] 11/1/2009 09:38

"The Only Story in Town" ...



Of course, the money trail should be obvious - low deposit rates, IFAs recommend CB funds (OEICs), units bought, managers buy bonds. (We wish.)

A bit further on, demand means companies can go to the market for funds at a lower rate than currently. By then it will have been time to switch to equities anyway.

[kiwi2007] 10/1/2009 00:16

Cash is no longer king for income

By Matthew Vincent
Published: January 9 2009 18:31 | Last updated: January 9 2009 18:31

Financial advisers are now moving private investors' money out of cash and into corporate bonds and selected equities, in response to a "significant" increase in demand for higher-yield investments in recent weeks.

Barclays Wealth, Collins Stewart, Newton, RBC Wealth Management and Punter Southall all report that more clients are seeking improved income yields – with many taking advice even before Thursday's Bank of England base rate cut.......

[borderbill] 08/1/2009 09:05

hosede, thank you for your comforting words !

[hosede] 07/1/2009 11:49

But you do have a presumed 7-8% yield Bill, so even if the price goes nowhere it's not too bad - unless you've bought on margin!

[borderbill] 07/1/2009 10:33

Oh dear, this isnt going so well, back to where I started on average now. Thought these would stand up better against the background of rising gilt yields.

[mac15] 07/1/2009 08:30

Choosing time of day to deal seems important as well!. Bought some these as a "safer" deal by averaging over last couple of days, but surprised at size of swing. Will get some more today. Also deal in pref shares but easy to get ripped off there with size of spreads on top of stamp duty. Looks like MMs also play games with these also.

[hosede] 06/1/2009 22:26

No idea Morgs, but the quoted NAV for the last five days has been 109.67,.84,.35,.86 and .27 i.e within a 0.5% range - I think the lesson is to select one's entry and exit with great care.

[morgs] 06/1/2009 15:59

Woops, wonder what that fall (2%) was all about?
Is this still the rumblings of the DB Bond conversion to FRN last week?
Can anyone illuminate me?

[jonwig] 06/1/2009 08:05

Agree with your last sentence, kiwi.
Also in FT, Lex yesterday (US market but...)

US market performance

Published: January 4 2009 18:38 | Last updated: January 5 2009 09:39

The new year begins with reassessment and resolution, hence perhaps the tendency for markets to rise in January. Over the past century the Dow Jones Industrial Average has risen in the first month of the year more than 60 per cent of the time. Although the average gain is a mere 1 per cent, insignificant in the context of a market that lost almost a third of its value last year, it is worth considering the prospects for equities to rally in the months ahead.

After all, stock markets swiftly look through recession to prospects once the downturn is past. On the cyclically adjusted price/earnings ratio calculated by Smithers & Co, the S&P 500 is close to fair value just below 900. Alternatively, on a balance sheet measure, the market now trades well below the replacement cost of assets.

Back down to earth Valuation alone is not enough, however. Investors also need to take on more risk. The catalyst for that could be the realisation that inflation is not dead. Tax cuts and a spending package from the incoming Obama administration, combined with monetary stimulus and cheap petrol prices – JPMorgan calculates that lower petrol prices could boost disposable incomes by $400bn in 2009 – should get the economy going.

So watch for a jump in yields on Treasury inflation-protected securities. The corporate debt market should also lead the way, with bond spreads contracting from levels that imply default rates at Great Depression levels. Russell Napier, strategist at CLSA, notes that the four great bottoms in equity valuations – 1921, 1932, 1948 and 1982 – were preceded by enthusiasm for corporate bonds. Meanwhile, stabilising car sales and copper prices will be helpful indicators that the worst is over.

Of course, structural changes to patterns of saving and spending, not to mention the federal government's indebtedness, remain long-term worries. The US may still be in a long bear market that began in 2000. But the prospects for some near-term relief suggest a case for optimism, at least at the start of the year.