Posted by: Matthias Paul Kuhlmey
The American palate has had a love-hate relationship with Asian-induced cuisine, but, once again, interest in these creations appears to be strong. Especially when one (as my family) lives near the hubs and Asian centers of influence, e.g. New Jersey’s Fort Lee, a Kimchi Burger is nothing to write home about, but is to be expected. In an attempt to “cook-up” a well-diversified global bond portfolio, the fusion choices are extraordinarily baffling, and some are clearly relatable to “in-love” and “out-of-love” scenarios.
Most notably, by definition, are Chinese Dim Sum Bonds. Dim Sum does not only refer to a traditional Cantonese way of preparing food in small bites (or dumplings), but also to an increasingly important segment of Hong Kong-issued fixed income, denominated in Chinese Yuan. This market has been hot and cold, with the latter trends mainly impacted by investors’ concerns over currency exposure, liquidity, and credit quality. Whereas a positive trend is forming, with issuance volume increasing, returns for Dim Sum Bonds have been negative for the first quarter of 2014.
As with Chinese bonds, the “hot and cold” relationship is also playing out in Japanese Government Debt (JGBs). This past Monday, new issuance for the 10-year JGB did not trade once, for the first time in 13 years! According to market participants familiar with the situation, the massive buying program by the Bank of Japan, in an effort to ultimately fight deflationary forces, has distorted conditions, with the Government currently “recycling” 70% (!) of total JGB issuance – how about this for a commitment to Quantitative Easing?!
Policymakers have not only altered outcomes in Asia, but also in Europe. Peripheral European Debt, which was shunned after Greece’s Debt restructuring about 2 years ago, has recovered to levels not expected by most. The yield of Italian 10-year Government Debt even reached a historic low, noted at 3.11%, some days ago.
Whereas a failed auction in Japan and surprisingly low refinancing cost for seemingly troubled nations do not establish a trend, the global investment community continues to receive warning signs to the potentially inherent limitations of Quantitative Easing. Low yields are not necessarily indicative of a recovering economy and the end of deflation, but are a reflection of Government intervention at all costs, given the example of Japan.
For all the cooks in the kitchen, two important lessons should be noted: 1) the value of most Government-issued debt continues to be inherently flawed; and 2) relative value calculations favoring stocks over bonds on the basis of yield differentials may prove to be incorrect, as the “garbage in – garbage out” rule applies under described circumstances.
For further information, please see my latest article with The Huffington Post, The World Is Flat – Again!, or listen to HighTower’s recent Collective Wisdom Podcast, recorded with my partners Richard Steinberg and Michael Bapis, both of whom reside at our HighTower offices in New York.