Banking, Bonds and Interest Rates
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Trading Features / Strategies from Simon Denham of Capital Spreads.
The huge issuance required by the various state agencies across the globe may now be matched by the refinancing demands of the private sector. Debt to Equity levels may become ever more important as investors try to estimate the cost to various businesses of their ongoing borrowing requirements.
It is all very well interest rates being at nought to one percent but corporate bonds are still trading at around the 6-10% region.
Yields on Tesco 8yr bonds (you would have thought Tesco one of the safer borrowers) are at 5.8 % which is 0.5% higher than April ’07 when base rates were actually more than 4% above today.
Next plc 7yr are close to 10%. If sterling manages to stabilise then we are looking at the possibility of borrowing to inflation spreads being around 10% for quite reasonable issuers. This is not a sustainable level for any business with a heavy equity/debt ratio as they will be at the mercy of undercutting from competitors.
Barclays has come out with nice numbers and the market has responded with an 8% rally up to 115p. I have stated before that the Board at Barclays are hardly likely to be outright lying about the valuations of their books and they would now have to be receiving the connivance of their auditors if this were the case.
In the current environment auditors are not going to risk their own partnerships even to protect lucrative corporate work. Although you suspect that there might have been a smidgeon of suspicion of this in times past.
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This leads neatly onto the woes of the rest of the banking system. It is a truism that derivatives are generally a ‘no net gain’ product. For every winner there is a loser and vice versa.
While the banks have been busily writing off all those CDO’s, MBS’s, Sub Prime lending bonds etc all the ire of the various Governments and journalists have been focused squarely on their problems to the avoidance of the other side of the coin.
Somebody somewhere has made a great deal of money indeed. Yes, a few billions has been paid out in ‘bonuses’ but it must be assumed that the vast majority has been paid out to Builders, Surveyors, Smaller ‘Mid Western’ banks, Solicitors and (yes) borrowers.
The smaller banks lent money on properties now known to have been vastly overvalued and to people unable to pay in the knowledge that the debt could be packaged up and sold on to the big investment banks on Wall Street (and then onto ever smaller and smaller investors).
Yes the big houses should have done more homework on the underlying assets but they probably considered that the lender of ‘First Resort’ (the lending bank) would have at least valued the properties correctly. For all the incompetence of the Investment Banks at least their motives were merely profit not fraud.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.
'Banking, Bonds and Interest Rates' edited by DB, updated 09-Feb-09
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