Charles Dickens,Alistair Cooke, the Proclaimers.......30 Aug 2019 22:44
Spotted the link? ...... This is another letter from America.
Now In LAX waiting for a flight and browsing this board , I seem to have missed ~5000 posts but only two real issues , the CITI RNS's and whether the bonds will sell .
There is so much misunderstanding about the US $ denominated Bond market that I though I'd set out a few basics, so here goes:
Bonds are graded into ten categories (roughly AAA to C/D )of which the bottom two categories are essentially defaulted,so 8 levels of sellable bonds of which SXX are in category 6, so pretty far down the pecking order.Only the top four categories(AAA to BBB)are deemed "investment grade" and most investment mangers are legally required only to buy investment grade, so SXX potential buyers are a much reduced pool.
Why are the bonds priced in $ US? - that's because some 60% of all the worlds corporate and government bonds are $ denominated and much of the rest of the bond market is in the currency of the issuing country , generally in the Eurozone, UK and Japan.
Most government bonds have a negligible risk of default because the issuing country can simply "print "their own currency to meet the liability. Obviously not true when the borrowing country is borrowing in dollars , not it's own currency(see Argentina).For US lenders the dollar loan offer the advantage that there are no FX issues to impact their returns.
Why does it make it difficult for SXX? Well ,I recently had a conversation with a US-based investment manager of bond funds and he told me that his benchmark is essentially the rate of inflation or medium term deposit rates at the bank, both of which are low and likely to fall for the foreseeable future. he can therefore guarantee to comfortably meet or exceed his benchmark by holding "Muni's"and a range of investment grade bonds and he (and others like him) would therefore have no inclination to risk buying lower grade or"junk" bonds of the type SXX are offering.
Finally I must comment on the St Louis fed charts which have been referenced here several times.
That chart is actually the Bank of America Merrill Lynch ETF tracker and what it does is monitor most of the ETF's in the US which buy and hold hundreds of"high yield" B grade bonds, where the risk of a single default is minimal, and it tracks the average yield a RETAIL purchaser gets when buying one of those ETF's in the high yield space. The yield the ETF offers is as a result of holding that very wide range of B grade bonds, many of which were issued some time ago and HAVE A TRACK RECORD OF COUPON PAYMENT. It tells you NOTHING about the prospects for an SXX bond issue or its likely coupon!!!
As an example I have glanced at one or two of the ETF 's tracked and their holdings include bonds from ALTICE(a Europe based telecom and media co. market cap 30 bill euros),SPRINT (US telecom MC $28 bill)and Bausch(Canadian pharma MC $9 bill)all a far cry from SXX's position.
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