ValueBuddies.com : Value Investing Forum - Singapore, Hong Kong, U.S.

The most overvalued asset currently, does it make sense to part with your money to earn 1.65% pa for 10 years? interest rate is not going to stay low forever

US 10-Year Treasury Yield Hits Record Low of 1.65%
Published: Wednesday, 30 May 2012 | 9:46 AM ET Text Size By: Reuters

The yield on the U.S. 10-year Treasury note fell to its lowest level on record Wednesday, as continuing fears about some euro zone countries' ability to service their debt kept demand for U.S. fixed-income assets firm.

Yields on 10-year notes sank to a record low of 1.65 percent, down from 1.73 percent in late U.S trading on Tuesday.

The 30-year bond yield fell to 2.74 percent, its lowest level since October, and down from a yield of 2.84 percent in late U.S. trade on Tuesday.

Later Wednesday, the European Commission will set out its economic strategy for the euro zone, balancing growth with austerity steps.

"The market is worried about developments in Europe, which is keeping yields low," said a fixed-income fund manager in Tokyo.

"In the background, there are concerns about the strength of the U.S. economy, and until there are clearer signals from the U.S. Federal Reserve about its monetary steps going forward, demand for Treasurys will be firm," he said.

Italy's funding costs rose sharply at a bond sale on Wednesday, with 10-year yields topping 6 percent for the first time since January, as the debt-laden euro zone economy appears vulnerable to worsening debt troubles in neighboring Spain.

The yield on Spain's 10-year bonds hit a six-month high of 6.54 percent on Tuesday as Spain said it will soon issue new bonds to fund its efforts to prop up its financial sector and regional economies. That raised worries about whether it will be able to sustain its debt.

Independent rating firm Egan-Jones cut its sovereign rating on Spain deeper into "junk" territory on Tuesday.

Investors will be searching U.S. economic indicators for clues about the economic outlook, to gauge whether the Federal Reserve will extend its bond purchases after its so-called "Operation Twist" stimulus program expires at the end of next month.

The monthly payroll data on Friday is expected to show that employers added 150,000 workers in May, while data on Thursday are expected to show that U.S. gross domestic product grew 2 percent in the first quarter.

Copyright 2012 Thomson Reuters. Click for restrictions.

(30-05-2012, 10:31 PM)shanrui_91 Wrote: [ -> ]The most overvalued asset currently, does it make sense to part with your money to earn 1.65% pa for 10 years? interest rate is not going to stay low forever

The benchmark 10-year Singapore Government Security (SGS) yields only 1.49% p.a., even lower...

Like Buffett said, "Right now bonds should come with a warning label."

Assuming these bonds are available for retail investors in small allotments.

if it is euro crashed bonds could be pennies to the dollar and if a countries with a poor rating but still able to issue them I imagining yields could go as high as 15% - 20%

why not? who will pay you 20% on the dollar in this kind of climate ?

they may default for a while but is not like they going to disappear from face of the earth, once they get their act together and ratings start to improve won't they start paying again?

Maybe exception for greece since I see they don't have the will to pay off the debt yet want to be in euro my prediction is if they cannot form a government apart from them leaving or getting booted out of the euro I think the greek mafia will start running the show there and after a few years another military coup again one sponsored by the US or supported by the european union or both and then forced to pay back thru that way.

(31-05-2012, 10:29 AM)sgd Wrote: [ -> ]Assuming these bonds are available for retail investors in small allotments.

if it is euro crashed bonds could be pennies to the dollar and if a countries with a poor rating but still able to issue them I imagining yields could go as high as 15% - 20%

why not? who will pay you 20% on the dollar in this kind of climate ?

they may default for a while but is not like they going to disappear from face of the earth, once they get their act together and ratings start to improve won't they start paying again?

.....

I did not invest in bond. As far as euro bond is concern, a full default is only one of the risk, which is unlikely becuase the bond issuer will not disappear. But the more likely risk is the bond been re-structured, with a partial redemption etc.

my 2 cts

I only got one expectation from the Western world govts.

Please some more $$, I dun care its LTROs, QE twist or whatever freaking names you ang mos want to call it.
Just pump it and get it over with.

We need to clear out the crap inside the bowels once and for all.
Its getting very stupid.

(31-05-2012, 10:29 AM)sgd Wrote: [ -> ]Assuming these bonds are available for retail investors in small allotments.

if it is euro crashed bonds could be pennies to the dollar and if a countries with a poor rating but still able to issue them I imagining yields could go as high as 15% - 20%

why not? who will pay you 20% on the dollar in this kind of climate ?

they may default for a while but is not like they going to disappear from face of the earth, once they get their act together and ratings start to improve won't they start paying again?

Maybe exception for greece since I see they don't have the will to pay off the debt yet want to be in euro my prediction is if they cannot form a government apart from them leaving or getting booted out of the euro I think the greek mafia will start running the show there and after a few years another military coup again one sponsored by the US or supported by the european union or both and then forced to pay back thru that way.

Singapore Government Securities (SGS) are available to retail investors in small denominations of 1,000, but you would probably need to qualify and declare yourself as an sophisticated investor to buy sovereign bonds of foreign governments, cuz MAS as the financial regulator gotta cover their own behinds, right?

As for whether the countries with poor rating are able to pay you back, many potential outcomes are possible and it is really hard to predict what happens. E.g. they may force a steep haircut on face value (so if you buy really really cheap like 30-cents on the dollar and they cut face value by 50%, you come out on top, but if you buy 70-cents and they cut 50% then you lose) and concurrently their currency may drop 50% against the SGD resulting in FX losses to you. If we are talking about a country currently on the Euro but moving back to their own currency in the future, the currency depreciation scenario is almost guaranteed. They may also cut the stated coupon rate to lower their interest burden. The key point is that it is possible for governments to negotiate and change the original terms of the bonds when the country is on the verge of going under.

Or they can just default on their bonds outright, which I believe is what the Russian government did in late 90s (can't remember the full details) triggering the collapse of LTCM, the largest quant hedge at the time. History is full of examples of countries defaulting or undergoing debt restructuring. Can a retail investor really come out on top so easily? Think there are easier and safer ways to invest.

You are right I'll probably won't qualify anyway.

It's still tempting thought though.

Another sign of a bond bubble, Nestle is going to benefit immensely

-------------------------
Nestle Borrows More Cheaply Than France Amid Haven Appetite

By Paul Armstrong and Mehreen Khan - Jul 12, 2012


Nestle SA (NESN), the world’s largest food manufacturer, is so in demand by debt investors that it’s able to borrow more cheaply than France.

Nestle sold 500 million euros ($610 million) of bonds due July 2019 at a yield of 1.56 percent, according to data compiled by Bloomberg. That’s lower than the 1.58 percent yield on France’s benchmark seven-year bond, on a day when some of the nation’s other rates dropped to records as investors sought the safest securities.

Nestle is benefitting from the demand for haven assets that also sent yields on short-term government bonds from Germany, Austria and Belgium tumbling to all-time lows. As the euro- region crisis deepens, investors are snapping up debt of companies away from the periphery of Spain, Italy and Greece, particularly if they have diversified international businesses.

“We sold out of the gilts and Treasuries,” said Craig Veysey, the London-based head of fixed income at Principal Investment Management Ltd., a unit of South Africa’s Sanlam Group which manages the equivalent of about $3 billion. “With yields as low as they are, you can’t generate a return for your investors. We went into good-quality, investment-grade corporates.”

Melanie Kohli, a spokeswoman for Nestle based at the company’s Swiss headquarters, declined to comment.

Cut in Half

Nestle cut the cost of selling the bonds, its first euro- denominated issue since 2006, by 50 percent in a sign of investor appetite for highly rated corporate debt.

The Vevey, Switzerland-based company priced the securities at 15 basis points more than the benchmark swap rate, after initially marketing them at a spread of about 30 basis points, according to data compiled by Bloomberg.

French five-year note yields fell to as low as 0.888 percent today, while the nation’s two-year rate touched 0.137 percent, both the lowest ever.

Nestle is rated Aa2 by Moody’s Investors Service, the third-highest investment-grade ranking, and an equivalent AA by Standard & Poor’s. France lost its top S&P rating in January, when it was downgraded one level to AA+, one step higher than Nestle. It’s still rated Aaa by Moody’s and AAA by Fitch.

Tighter Spreads

Demand for corporate bonds drove spreads tighter in the past six months. The extra yield investors require to hold investment-grade European company debt narrowed to 170 basis points more than benchmark government notes from 200 basis points in January, Bank of America Merrill Lynch’s EMU Corporates, Non-Financial index shows.

To contact the reporters on this story: Paul Armstrong in London at parmstrong10@bloomberg.net; Mehreen Khan in London at mkhan108@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

http://www.bloomberg.com/news/print/2012...avens.html

Will it trigger company rush to offer euro bond, to tape into the capital market there?

1.65% is much lower than local corporate bond of AAA rating in Singapore

(13-07-2012, 11:38 AM)CityFarmer Wrote: [ -> ]Will it trigger company rush to offer euro bond, to tape into the capital market there?

1.65% is much lower than local corporate bond of AAA rating in Singapore

but you need bear foreign exchange risk, which could be much higher than just borrowing in SGD.