The Year In Review – 2013

28 December 2013


TUMULTOUS! That’s how I would describe 2013 in a nutshell, especially for fixed income investors and traders alike. After a stellar year for bonds in 2012, it was a story of the “taper-caper” as I like to call it, thanks to Bernanke & Co. With portfolios hemorrhaging throughout 2013, and still in considerable pain, we look at the major talking points of the year that would have affected financial markets on a region by region basis.

U.S. – Tapering Sets The Stage

With UST 10-yr yields happily in the 1.60% handle up until April 2012, the Fed sent markets into a panic with its first mention of tapering.

(Bloomberg)

“The market seized upon the bit of the Q&A exchange about the anticipated timeframe about an adjustment to QE,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “The Fed remains highly data dependent. The market is very skittish right now.”

In spite of the assurance that this represented only a slowing down of stimulus, rather than a total withdrawal of it, it did very little to assuage investors. The chart below speaks for itself – bonds are hurting! With yields seemingly asymptotic to 3% for 2013, we can expect that resistance level to be broken early in the new year as the Fed has already reduced its bond/MBS buying by USD 10bn. 

 

 

 

 

 

 

Unemployment data also played a vital part in the market’s fortunes this year. Every jobless claim and non-farm payroll number seemed to have added significance The 6.50% target was bandied about for most of the year to inform tapering, but will likely be revised lower with the US economy seemingly in recovery.

The government shutdown was a case of underemployment rather than unemployment, but certainly made for headlines as  we saw …more than 800,000 federal workers home without pay, closure of national parks and crippling of some programs, while leaving essential services up and running” (Wall Street Journal). Gridlock is likely to be a recurring theme in 2014, as debt ceiling talks will resume very soon.

Caribbean – The Unicorn Reappears

Rare Caribbean bond issues in the form of BERMUD 24, and TRITOB 24 made us forget about tapering, even if just for a little while. Some of us began to wonder if TRITOB was more mythical than material, as the existing issues (2020 and 2027 maturities) proved largely elusive.  With specific reference to TRITOB, many local and regional investors were unhappy about their allocation in the new issue, and elected to participate via the grey market. We’ve seen continued buying in the name, and expect this trend to persist well into 2014 given the improved liquidity (USD 550mm). Next on the new issue calendar: Bahamas!

The Eastern Caribbean has been hit quite hard due to its struggles with servicing debt, and a much weaker tourism sector.

IMF:

Growth in the Caribbean remains subdued, particularly in the tourism-dependent economies (The Bahamas, Barbados, Jamaica, and the countries of the Eastern Caribbean Currency Union, ECCU) where activity is constrained by low tourism flows and a decline in construction.

Fiscal and external vulnerabilities remain significant in the tourism-dependent economies. Public debt is very high (ranging from 60 percent to 150 percent of GDP), and external current account deficits are large (in most cases, exceeding 10 percent of GDP in 2013), reflecting the region’s high energy import bill and poor competitiveness.

Barbados has certainly seen their bonds’ spread widen this year (2.5 – 3pts) as they’ve undergone downgrades (see screenshot below) by the major rating agencies and a failed tender deal and new issue.   The consensus is that the long bond (2035 maturity) should have a much richer yield – above 10%. As such, SELL recommendations have been aplenty even with the IMF set to come on board. However, there is the underlying sentiment that Barbados will honour their debts and spare investors extreme losses (either realized or unrealized). They’ve at least been able to borrow floating rate money, in the amount of USD 150mm for 5years to carry them through part of the New Year, taking their Public Debt ratio to 68.1% (Central Bank of Barbados).

 

 

 

 

 

 

To round out the regional highlights for 2013, I believe First Citizens was unrivalled in terms of the anticipation and success surrounding their IPO. Although not open to non-T&T nationals/ institutions at issue, these same players would’ve been quite active in the secondary market. I wonder if there were any firms that tried to set up a locally domiciled subsidiary just to be eligible for the issue!?!  At any rate, it was a much-needed sponge for liquidity on an individual/firm basis. However, excess liquidity at the bank level remains quite high (TTD 7.8bn in November). One can expect GOTT (by way of the Central Bank) to issue more bonds, and perhaps issue more in state-owned enterprises’ shares to the public.

LATAM- Chavez, EM Fund Flows

The death of Hugo Chavez was (perhaps morbidly) a credit positive event for Venezuela for those who dabbled in the high yield market this year.  Since downgraded to Caa1 by Moody’s, due to instability of this regime led by Maduro (Capriles supporters will still argue that their man was the real winner) – government control of stores, questionable forex auction system – there have been buyers of the short end (2014 bonds at ~14% ytm).

In terms of LATAM as a whole, bond issuance was not a resounding success as it was for 2012 due to rising interest rates. Costa Rica, Peru, and Chile would be where we’ve seen some pockets of value in the corporates. As one would imagine, LATAM Fund flows (both on the equity and bond side) were hit quite hard due to tapering.

 

 

 

 

 

 

Yes, 2013 will be a year to forget for many!

Europe – Austerity Takes its Toll

The madness that so nearly was…oh Cyprus! It seems like such a long time ago that Cypriots were very close to having their bank savings taxed. The thought that “Cyprus would impose a levy on bank accounts as part of a 10 billion euro ($13 billion) bailout by the European Union broke with previous practice that depositors’ savings were sacrosanct.” (Reuters)

Europe has been relatively quiet this year, however, which was probably a much needed respite from recent turmoil. The Guardian says it best as … “politically, the sharp edges of the crisis have blurred, allowing leaders to revert to their preferred mode of muddling through, criticised often as complacency. In 2014 Ireland will be the first of the bailed-out countries to move back into the bond markets to finance itself, also prompting trumpeting of assertions in Brussels and elsewhere that the medicine is working.” Maybe the Caribbean will have some of this bitter medicine instead of the usual New Year’s champagne toast!

ASIA – Taper Worries

I’m exhausted by using the word ‘taper’ so frequently this past year and Asia is probably even worse for wear. There are two schools of thought here; the market responds positively to rising rates as it may be a sign that the economy is rebounding, and then there is the persistent worry that bondholders will be negatively affected by interest rate shocks. Japan is still pumping stimulus into the economy, and a depreciating yen versus the US dollar should boost exports in the short term (as has been the case in India and Indonesia). The Singapore dollar took a beating when the first round of tapering was announced as well. On the other hand, some feel that “China could be immune to the ill effects of QE tapering for several reasons: capital control; high savings, high investment and high manufacturing capacity; huge foreign exchange reserves; low foreign debt; and sustained current account surpluses.” (Global Times)

While the year has been rough for many fixed income holders, we hope that our efforts to inform you of the options and strategies available were of use. Last year’s mantra of ‘Cautious Optimism’ was followed by 2013’s view of ‘Rising Rates.’ We will have our 2014 Outlook for you soon!

For more on our take on the triumphs and setbacks of 2013, to share your views or ask any questions, contact us at 1 – 868 – 628 – 1175 or email us at info@nullfirstlinesecurities.com 

Gerard Stephens

Account Executive

Sales and Trading

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