Article / 04 January 2017 at 11:30 GMT

Weekly Bond Update: Corporate bond portfolios post strong 2016 returns

Fixed Income trader / Saxo Bank
  • It's time to review our 2016 trade views before we launch new portfolio strategies
  • 2016 was dominated by a few single events, notably Brexit
  • Thomas Cook was one of our stronger picks
  • Noble Group could be a compelling bet among opportunistic portfolio investments

 Out in front. Thomas Cook was a strong pick for the bond portfolio as neither Brexit
nor terror threats reduced travel demand significantly. Photo: iStock

By Michael Boye

As we enter 2017 and look forward to the challenges and opportunities it will bring, let's spend a few minutes looking back and review some of the fixed-income trade views that we launched and talked about over the past year.

This will also be the last review of the current bond portfolio structure as we get ready to launch new focused portfolio strategies that will encompass all the features of our new online bond trading functionality. Stay tuned for this.

Core portfolio

The 2016 investment year was dominated by a few single events, none of which shook the ground more than the UK's surprise Brexit decision. On June 30, when adding Royal Bank of Scotland's 2021 subordinated bond to this portfolio, we noted that "[Brexit] has led to substantial turmoil in all UK assets due to the increased political and economic uncertainty. However, we think these concerns are overblown and that a far more market-friendly exit deal is highly likely". 

While we were right to say that the UK and British investment assets would indeed cope with a Brexit vote (the FTSE 100 equity index finished the year 14% higher), we didn't identify the strongest rebound candidate in Royal Bank of Scotland, as the structural challenges of a low-yield environment and a regulatory clamp-down continued to weigh on financials in general.

Core Source: Saxo Bank

The British travel agency Thomas Cook, however, proved a much stronger pick when we look back, as neither Brexit nor terror threats managed to reduce travel demand significantly, while in fact depreciating sterling could even be said to have increased competitiveness. The 2021 bond may even be subject to an early call in 2018, which would limit the potential yield to 3.1%.

Opportunistic portfolio

As analysts we like to point at our winners, but in reality the laggards could be the more interesting bet, supposing the winners have already exhausted their potential. This might especially be true in bond investments, as strong performers – such as in the case of Thomas Cook mentioned above – may be subject to early calls or have very little yield to maturity left. 

Assuming this logic, the struggling Noble Group could be one of the compelling bets among the opportunistic portfolio investments. The Singapore commodity trader found itself facing serious headwinds together with the entire industry in early 2016 when commodity prices plummeted around the world. Since then the company has raised capital through equity and asset sales, but its outlook remains muddy as reflected by the still very high yield.


Source: Saxo Bank 

Banco do Brasil found support in the optimism which followed the impeachment of former President Dilma Rousseff and the expectation of more market-friendly policies of the new Temer administration. 

Late in the year, the French shipping giant CMA CGM turned around after the combination of industry-wide earnings challenges and a major acquisition of Singapore competitor NOL had raised concerns among bond investors. The privately held company announced cost cuts and asset sales to the tune of more than $1 billion, and the 2021 bond jumped from a price level of 75 to currently 93 in the span of a few months.

Operating in the fiercely competitive container shipping industry will likely mean another challenging year for CMA CGM ahead though.

– Edited by Gayle Bryant

Michael Boye is a fixed income trader at Saxo Bank.
benlouro benlouro
very good picks here. please keep up sending good bond ideas... this are important for more conservative clients
fxtime fxtime
benlouro you are so right :-) Also have you heard from Ken Veksler recently...I am not sure if he has changed Accumen management ?
benlouro benlouro
fxtime regarding Ken I don´t speak with him a long time. a couple o weeks ago I wonder what did happen to him....I thought to contact him too...but did not. I will now.


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