A significant amount of my portfolio is in fixed income, or broadly the bond market. About 60% is in high-yield perpetual bank bonds, another 40% is in what should be considered conservative funds.

The bond market is much larger than the stock market. This includes government and corporate debt, and the pricing is supposed to be much more stable. This is mainly the domain of sophisticated investors like hedge funds, insurance companies, banks, and other big institutions. These are supposed to be professional and savvy investors, and not prone to panic.

Well they are panicking now. The bond market is going nuts.

Government bonds should be increasing in price and decreasing in yield now. It has gone this way at first, but now it is reversing.

You can see my Temasek bond spiked to 120 about a couple of weeks ago. It has gone down to 112, despite it having virtually no risk of default and markets becoming even more volatile. This shows that investors are now selling safe assets to raise cash, and there are few takers. Its likely that much of the cash is going to meet margin calls, as all markets have crashed. There are no safe havens except cash. More specifically, US dollars. The US dollar has surged to 1.45 against the Sing dollar.

In addition, the spreads are getting wider i.e. the price the buying is willing to sell and the price the buyer is willing to buy. Normally it should be no more than 2%-3%, but I’m seeing spreads of 5% – 15%, especially in the high yield space.

You can see how much high-yield bonds have crashed in just 2 weeks below, with no respite. There wasn’t a slow trend down, it was a straight jump from a cliff. While the below is just one bond, many others are like this too.

I think for people with a lot of guts, there is a great opportunity to lock in incredible yields. But the bottom is nowhere to be found. Only when markets and people calm down, along with corona virus cases, will the bond markets behave more normally.

While it does seem like massive panic now, no one knows if it can get even worse. But we should consider that there is a huge amount of cash now sitting on the sidelines, which can go in just as quickly as it went out.

2 thoughts on “The Bond Market is going bond-kers

  1. This wide spreads is what I was told as well when I had lunch with a banker specializing in these areas. Also hearing of managers having a hard time selling MAS papers.

    1. Yup its true. It has been a shock to me as I was used to buying US stocks, which are highly liquid. Not used to seeing 20% wide spreads. Situation is unprecedented

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