Liquidity Gone Wild, Missing the Big Picture

29 July 2013


Where’s the justice? For those of you that don’t already know, summer trading is hardly as much fun as Q1.  Less enthusiasm, mixed data coming in … maybe a time for rest and reflection? Locally, there’s been some decent activity with the First Citizens IPO; an opportunity we highly recommend. Attractive considering a 4-5% dividend yield and potentially substantial capital gains to be had.

However, hot on its heels will be a Government of Trinidad & Tobago (GOTT) 10-year TTD bond. Now, if we were to assume that this is similarly priced to the previous 10-year issue we get a yield of ~1.95%. Commercial banks’ hold excess reserves of TTD 5.8bn according to the last CBTT repo rate announcement. The First Citizens IPO won’t affect liquidity much (in the long run) even if all of the proceeds go to GOTT, as it will be redistributed via subventions. This surplus of liquidity on both micro and macro levels, of course plays no small part in keeping interest rates materially depressed.

The question remains though; is GOTT having their cake and eating it too (for now)? Is this an attempt to draw investors who may be in an IPO-induced frenzy? Conspiracy theories aside, I appreciate more frequent debt offerings as much as anyone else, but that is some CHEAP money, even within the context of a global low-rate environment.

Can we expect these debt offerings to persist, and eventually have a truer yield curve perspective? Who knows, but for now we can certainly compare what exists on the market.

Here we have TTD 10-yr paper with yields well below USD UST 10yr rates (62bps spread while I write this).

 

 

 

 

 

 

 

Not a fair comparison? Well let’s try this; TRITOB 20s currently yield ~2.47%. How do you begin to reconcile, a lower yield for longer duration paper in a currency that is less than one-sixth the value of the USD? BERMUDA (AA-) is better rated than T&T (A) and its 2023 bonds yield >4%. Before you accuse me of being myopic, what if I told you that I could easily find more than 10 USD-denominated bonds with better credit metrics, similar or shorter duration and better yields?

Take a look for yourself:

Firstline Investment Grade Options

Firstline Investment Grade Options

The second section of the list even more clearly identifies the point. While these are lower rated, their duration is much lower as well, and far more liquid.

Even considering the challenges in obtaining USD, to which there are solutions, surely you may be able to better mobilize some funds within your current USD portfolio. So, you say you’ve got nothing else to invest on the TTD side?  Why not consider repos, which may allow for more nimbleness? As rates continue to rise, you can easily find 1-year repos at 1.75% and roll these over. Compare that to a 10-year investment which at best offers 1.95%.

As Uncle Ben (Bernanke) waffles between tapering and prolonging stimulus, the upward trend for interest rates has been established. Be prepared!

To help you get prepared, please contact us at info@nullfirstlinesecurities.com.  

Gerard Stephens

Account Executive

Sales and Trading

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