Will Bunds break back down below 1% in yield today? In yesterday’s trading the new and current benchmark bond, the 1% 15-Aug-1024, got within just a few cents – 9 cents to be precise – of doing just that. The curve is worth more than that and so, in “old money”, that’s comparing the bond with its predecessor as the benchmark with its shorter duration, this is tantamount to being back below 1%.
There is a lot of steepness in the 7yr to 10yr part of the Bund curve and value shifts around it very quickly although the sweet-spot remain in the 10s where it pivots from concave to convex. But would I really, for choice, want to own bonds at 1% or either side of that yield? It is hard to argue that 1% is a compelling income but I suppose since we went through 2%, we’ve been of the same opinion. However, there is still not a lot in the economic reporting space which would give cause to sell again.
We had an exchange with a client yesterday focused on a CMS issue in which, as a final line of defence, he suggested that curves can invert. I suppose he wasn’t aware that the 2s/10s Bund curve hasn’t in fact inverted since 1992 and that the mean curve has been around 125bp. I’d love to argue that point with him but I’ve been in this business long enough to have learnt that there is no sense in trying to confuse an investor with facts once his mind is made up.
Primary parade
Although primary issuance is still on fire – the US had another huge day – with General Motors knocking out US$2bn in 2 tranch deal and Roche issuing US$5.75bn over 6 tranches. Thomson Reuters got US$1bn away, and hidden in the mass was a very sweet little retail focused deal by Tiffany. This stuff is still being lapped up as though stocks were about to run out. The confidence and swagger of the credit markets defies the uncertainty in equities which seem to be scared of their own shadow. The S&P is now looking at 2,000 points from below again which just a week or so ago looked highly unlikely. Not even the blow-out of the Alibaba IPO and the boiling-hot reception of Apple’s iPhone 6 seems to be able to put a spring into the step of global stock markets.
Credit indices seem to temporarily divorced themselves from equities, so we have “risk off” in stocks and “risk on” in credit. I’m not sure how right that feels. Recent history would indicate that there has to be an arbitrage trade in there somewhere.
Tesco tumbles
However, you’d have to have been on the moon yesterday to have missed the big horror story which will certainly have an effect on credit in one shape or the other. Accounting irregularities in Tesco are not funny and not to be trifled with. The stock went into free-fall, closing down 11.5% on the day, on the news of a £250m overstatement of projected profit. The retail landscape in the UK has been polarising for a few years now and Tesco, formerly regarded as one the most bullet-proof of British businesses is trapped in the middle.
It is still the nation’s largest retailer but the trouble seems to be in the culture where growth has to be conjured up at any price and where it was hoped that structural inadequacies could be glossed over if the numbers looked right. It is bad to deceive the shareholders, but in some way it is worse for the management to deceive itself that all is fine in the garden. I don’t like what I see and would be tempted to suggest that the risk of holding the name is, at this point on time, not worth it. I’d not try to catch this particular falling knife.
GM has proven that there can be life in some of the old dogs and that they do come back, but investors who exited the name five years ago will have had far less sleepless nights. Tesco might not be dissimilar. Never forget that the first cut is the cheapest. Vulture buyers will soon be filled and there could be a long gap before the next usable bid shows up in the street.
