Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 17 August 2016 at 10:00 GMT

Weekly Bond Update: Portfolios recoup Brexit losses

Fixed Income trader / Saxo Bank
  • We called it right on this stormy summer
  • Mosts assets have clawed back their post-Brexit losses
  • RBS and Thomas Cook bonds had very robust recoveries
  • Investors in RBS and Thomas Cook shares should take care
Thomas Cook
 Thomas Cook bonds have staged a convincing recovery. Pic: iStock

By Michael Boye

Note: For more on the performance of our SaxoStrats corporate bond portfolios and individual bond trade views sign up for our Thursday webinar here. It starts at 1130 GMT.

A couple of months ago we warned, that this year the summer period might not be as calm and uneventful for financial markets as investors are used to. If nothing else, at the very least it's fair to say we nailed that one!

However, following the dramatic decision from the United Kingdom to leave the European Union, most asset classes have recouped initial losses and moved on to new highs for the year. Corporate bonds, in general, are no exception, and this has lifted performance back into positive territory for both of our SaxoStrats bond portfolios.

Unsurprisingly, given the above development, on an individual basis the biggest positive performance contributors have been Royal Bank of Scotland (RBS) and Thomas Cook bonds. Apart from their British roots, both issuers have been facing other extraordinary industry specific challenges as well, such as the European banking crisis and terror threats respectively. 

But while these issues are likely to remain and continue to weigh on each of these companies respective earnings power, we think shareholders have the most reason to worry, as the solvency of neither is put at immediate risk.

In fact, the recent EBA banking stress test result revealed, that while RBS losses were among the highest in the adverse testing scenario, its current solid 15.5% core equity ratio ensured that it stayed well clear of failing the test. In the case of travel operator Thomas Cook, it has been so sufficiently confident in its liquidity strength, that it launched a bond buy-back programme of its own bonds earlier this year.

The recent performance of bonds and shares seem to support our view, as both bonds have rallied, while equity performance has been far more subdued as evident below:
TC and RBS
Share performance of Royal Bank of Scotland and Thomas Cook has significantly underperformed its bonds since Brexit. Source: Bloomberg

Another interesting case of different outlooks for shareholders versus bond holders might be found for the Singapore commodity trader Noble Group, which has been on a recovery journey of its own since the great commodity price slump. So far, the company has opted to let shareholders carry the bulk of the refinancing burden through a rights issue, and protected credit investors by refinancing bank lines.

Their efforts saw a setback this week, when Moody’s downgraded its credit rating by two notches, from Ba3 to B2 citing liquidity concerns. Interestingly, another rating agency, Fitch, just hours before said that Noble’s liquidity crunch could be temporary.

Despite the market arguably already pricing in an even more dire scenario, the price of its 2020 USD bonds dropped a few points further to a price of 78 with an effective yield of more than 15% reflecting high risk, but in our view also a reasonable reward for investors.

– Edited by Clare MacCarthy


Michael Boye is a fixed income trader at Saxo Bank

For more great Saxo webinars on other asset classes click here.


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