RATE CONUNDRUM

1 July 2013


 

Big Ben (Bernanke) gave markets quite the scare at the last Federal Open Market Committee (FOMC) meeting. Since then we’ve seen yields soar past and eventually settle to ~2.50% on the UST 10yr.

 

 

 

 

 

Source: Bloomberg

Everything under the (risky-asset) sun sold off (especially in EM-land) on the news of the Fed’s monetary ‘tapering.’  What we did know was that rates were bound to rise substantially, but finally we have some guidance as to when. Or do we? Perhaps the expectations of the rate hike are prematurely bringing it into existence? I have no doubt that the Fed has a solid grasp of interest rate theory, and maybe their intention is to allow for an early shock to the markets. When stimulus / easing / bond-buying or however you’d like to phrase it, is finally cut, the market reaction may be quite subdued given the time over which it was already priced in. The labour market might just be the ‘known unknown’ that puts a spanner in the works, but all in all I think rates have taken the first significant steps of their ascent.

The question we’re left with is; what do investors really want? At this point we can introduce our rateconundrum mantra. In this scenario we examine the reality of the past few days where both demand for treasuries AND risky assets simultaneously increase. Is this an aberration? Or, rather, is it a case of investors trying to hedge their bets by going long only on both equities and Treasuries? Equities, even with recent volatility have been on an absolute tear and some argue that they are still fairly attractive. However, with the Fed clearing the air, why are investors still clinging to Treasuries?

 

U.S. stocks rose, sending the Standard & Poor’s 500 Index (SPX) higher for a second day, as China’s cash crunch eased and slower-than-forecast economic growth fueled speculation the Federal Reserve will maintain stimulus.

 

Source: Bloomberg (June 26th 2013)

Maybe they want their bread buttered on both sides – I would too! Or, is it that they are so heavily exposed to fixed income that a continuation of stimulus buys them some time to unwind their positions?

All rhetorical questions really, as I am not a mind-reader. What we do know is the EM credits have cheapened, and spreads are wider. Embrace the volatility, as a softer market may brighten that twinkle in your eye when it comes to names like Petrotrin. We view this name as very attractive especially in comparison to the sovereign and industry peers across LATAM (even after adjusting rate expectations). The 2022 issue doesn’t trade as often as the 2019s but is a better short-duration play (modified duration of 3.91).

 

 

 

 

 

 

Source: Bloomberg

The point is, whatever your position on interest rates, don’t sit on the sidelines. In a market where bonds can easily trade 2 or 3 points wide, the potential for attractive yields exists. While new bond issuance has dried up across EM, and they tend to be dry in the Caribbean anyway, there is value to extract from the secondary market. We look forward to delivering this value to you going forward.

To find out more about the potential for attractive yields, or for more about what we do, please contact us at info@nullfirstlinesecurities.com

Gerard Stephens

Account Executive

Sales and Trading

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