Neel Gopalakrishnan, Credit Strategist
Joanne Goh, Equity Strategist
DBS Group Research
Credit: Bond buybacks to support secondary market prices
In the last few days, two Asian HY issuers have announced bond repurchase or tender transactions to redeem part of their outstanding Eurobonds. A few Chinese issuers have also announced buy backs of small amounts of their bonds in the secondary market. While such transactions may be opportunistic, we believe the likelihood of buybacks will offer some support to the secondary market valuations of bonds of companies. In the high yield space, we would look out for BB rated credits which have adequate balance sheet liquidity or good access to bank funding. We had noted a couple of possible candidates in our report on Indonesian high yield dated 15 August. We believe the likelihood of Indian HY issuers buying back in a big way is relatively small given many of them are in the middle of sizeable capex (as we noted in the Macro Strategy dated 2 October). Another deterrent for buybacks is that most HY bonds issued over the past few years generally have low coupons, limiting incentive for companies to redeem the bonds early. Nevertheless, for bonds trading relatively cheap or below par, this is an area worth monitoring.
Equity: Flows to commodity ETFS reverse 4-month negative downtrend
U.S.-listed ETFs registered the second-largest monthly inflow of the year in September with $36.7bn. Bulk of the monthly inflows came from U.S. equity ETFs which registered $28.8bn. U.S. fixed income ETFs registered the next largest inflow despite the Fed hiking interest rates and yields on 10-year and 30-year treasuries approaching their highest level this year. Meanwhile flows to International equity ETFs remained positive, although they have slowed to the year’s weakest, while flows to International fixed income ETFs accelerated during the month. We are of the view that the strongest outflows away from emerging markets are behind us and flows will return as value starts to emerge either in the equity or fixed income space.
Reversing the trend seen over the past four months, commodity ETFs registered monthly inflows – albeit marginal. This is supported by rising oil prices which reached a four-year-high with Brent Crude above $82 a barrel after a decision by the OPEC not to raise production as US sanctions on Iranian oil tightened global market supply.