03 June 2019 Issue 811
Global Market Commentary
- US: US President Trump threatened to impose import tariffs on Mexican goods suddenly, aggravating the market’s worries about the trade wars may lead to economic recession. For the whole week, the Dow fell by 3.01% to 24,815.04. The S&P 500 index fell by 2.62% to 2,752.06. The Nasdaq fell by 2.41% to 7,453.15.
- Europe: Italy may face EU fines for failing to control its debt level, dragging down the stock markets. For the whole week, the UK’s FTSE 100 index fell by 1.59%, the German DAX index fell by 2.37%, and the French CAC40 index fell by 2.05%. The STOXX 600 index fell by 1.82% to 369.06 points.
- Asia: The Chinese government claimed that the US should take the responsibility for the frustrated Sino-US trade consultation. It is expected that China is also preparing to take retaliatory action on the US due to the Huawei issue. There is no sign that the trade war between two sides will end in short term. Over the week, the Nikkei 225 index fell by 2.44% to 20,601.19 points. The MSCI Asia Pacific Index fell by 0.55% to 152.36 points.
- US: The Sino-US trade war has become tense again, and the relationship between the United States and Mexico has also become tense, leading funds flow into the bond market. For the whole week, the yield on the US 10-year government bond fell by 20 basis points to 2.126%.
- Europe: The Sino-US trade war has become tense again, causing the market to worry about the economic prospect and funds flow into the bond market. For the whole week, the German 10-year bond yield fell by 9 basis points to -0.204%.
- Oil: The United States threatens to impose tariffs on Mexico, exacerbating market concerns about global economic prospect and oil demand. Over the week, New York oil futures fell by 8.75% to close at $53.50 a barrel.
- US dollar: The inverted yield curve of US bonds triggered market goes to the risk-averse market, which pushed up the exchange rate of US dollar. For the entire week, the Dollar Index rose by 0.140% to 97.750.
- China: Due to the tense relations between China and the United States on the trade and technology issues, the Renminbi is facing depreciation pressure. For the whole week, the yuan fell by 0.178% against the US dollar at 6.912.
- US: Donald Trump terminates preferential trade status for India under GSP, eliminating duty-free treatment for nearly 2,000 items exported by India to the United States.
- US: Trump said that Mexico might lose its status in auto industry if it does not take action on illegal immigration issues. The American automakers group said that the imposition of tariffs on Mexico would bring huge costs to the US auto industry.
- U.S: US Secretary of State Pompeo urged Germany to take action against corruption, espionage and unfair trade practices in China, or intelligence sharing may stop between the US and Germany.
- Euro-zone: ANSA reported that Italy will inform the European Commission that it will reduce the cost of welfare to avoid disciplinary action for failing to reduce the burden of public debt.
- Euro-zone: According to data from the European Commission, the final value of the consumer confidence index for the Eurozone in May rebounded from a negative 7.3 in April to a negative 6.5, the highest level since November 2018.
- Euro-zone: The French Statistical Office announced that the initial value of the growth rate of France’s consumer price index (CPI) slowed from 1.3% year-on-year in April to 1% year-on-year in May, slightly lower than the market expectation of 1.1%.
- Japan: Nikkei/Markit data showed that the final value of Japan’s manufacturing purchasing managers’ index (PMI) fell to 49.8 in May from 50.2 in April, higher than the market expectations of 49.6.
- Japan: The Cabinet Office of Japan announced that the final value of Japan’s household consumer confidence index fell to 39.4 in May from 40.4 in April, hitting the lowest level since January 2015. The market originally expected 40.7.
- India: According to data from the Central Bureau of Statistics of India, India’s first-quarter GDP growth rate of 2019 slowed from the previous value of 6.6% to 5.8%, hitting the lowest growth rate since 2014, and less than the market expectations of 6.3%.
|China Market Commentary|
|• China creates ‘Unreliable Entity List’ of Foreign Companies that hurt interests of Chinese firms. The relevant agencies have decided to investigate the FedEx’s alleged damage to the legitimate rights and interests of Chinese users.
• China’s tariff retaliatory action against the United States came into effect on Saturday (Jun 1) in Beijing. Subsequently, a white paper said that the US government should take the responsibility for the frustrated economic and trade consultations. It also claimed that China will not make concessions under extreme pressure. China does not want to have a trade conflict with the United States, but it does not mean China is afraid to have trade conflict with the US.
A key factor of searching yield
Within the latter part of the economic cycle, the default rate may increase. Among the many yield strategies, taking on additional credit risk is an important part of it. Historical experience has found that if investors are willing to give up some nominal “yield” in exchange for more protection from default scenarios. A secured high-yield bond deserves investor attention.
Senior secured bonds have capital structure advantages
Enterprises have different tiers for external financing. That is to say, if a company defaults and enters the bankruptcy process, the debt repayment will be based on the order of the capital structure. If the bond or loan has collateral, there is a corresponding asset as a guarantee. Senior bonds will be repaid in priority against sub-ordinate bonds.
Multiple assets can be used as collateral, including homes, machinery, automobiles or intangible assets. When a company defaults, the collateral can be sold and the debt of the company repaid. As senior secured bonds are prioritized in the capital structure, it is easier to recover the money sold.
Senior secured bond recovery rate is high
The recovery rate is the debt ratio that can be repaid or recovered once the company defaults. Its level will depend on a number of factors, including the nature of the collateral and the market conditions of the asset.
The characteristics of collateral for senior secured bonds make their recovery rate often higher than unsecured high-yield bonds. According to historical statistics, between 1987 and 2017, the average recovery rate of senior secured bonds was 62.3%, which was higher than unsecured and subordinated debt.
Recovery rate of different asset classes
Data Source: Barings; Moody’s
It is worth noting that Senior Secured high-yield bonds may not be able to provide volatility or provide risk protection for the down market. However, advanced mortgage high-yield bonds provide investors with more capital protection than traditional high-yield bonds.
Senior Secured bonds have market depth
Senior Secured bonds are not a new asset class. History dates back to the 1990s. Since the financial tsunami, Senior Secured bank loans have gradually been exchanged by Senior secured bonds, driving strong growth in this asset class. Currently, the total value of the market has exceeded $309 billion.
Secured is not a panacea. If investors do not have the appropriate knowledge and experience, they will not be able to distinguish between the pros and cons of collateral. More importantly, in the event of a default, experts are required to deal with litigation and other issues. Therefore, active management products with a long history can generate an extra return from selecting suitable items.