Analysis & Comment > Bond of the Week
Back to 2013
Bond of the Week: 10 May 2013
Bond of the Week : 10 May 2013
Here is an timeless observation on bull markets: Prices simply do not go up in a straight line. They zigzag higher, punctuated by consolidations and, occasionally, steep drops. With this in mind, I cast my eyes back to the bond market: will prices keep going up or, will they pull back over the summer? If the latter, would it not be a good idea to 'sell in May and go away'?
Technically, I am starting to doubt how much higher bonds will go over the near term. The catalyst for this view is derived from the chart action of the 5-year gilt yield recently. This yield jumped above the range resistance at 0.70% to break the multi-month downtrend. The slide from 1% is potentially over for now (see below). Across the Atlantic, the 5-year US bond yield is also firming. Sparked by the better-than-expected unemployment data, the yield jumped from 0.65% to 0.75% in six sessions, and tilted its near-term directional risk to the upside.
Downtrends in government bond yields were a major factor driving the bond bull market. If yields stop going down, it may check the bond rally.
Unsurprisingly, some of the long-maturity bonds are starting to dip. The Segro 5.75% 2040 encountered selling pressure near 120 to retreat to 117 (covered in BoW here); whilst the GE 4.875% 2037 is faltering near 106.5. The EIB 5% 2039 shed 3 points since early May. A glance at the long-maturity bond price charts clearly show that selling pressure is increasing. No longer can we expect the market to go one way only - up! - as supply is rising.
Against this backdrop, I would be tempted to book profits in some of the earlier buys, like the Enterprise Inns 6.5% 2018. The last time we flagged this bond as a buy was back in October 2012, when the bond was trading at 88 (see here for the BoW ). In 2011, we also featured this bond as a buy and hold (see here). What prompted me to sell this bond now is that the recovery scenario of the security has broadly materialised. Up 12 points in six months, the bond is trading slightly above par, which would be a good level to close out.
View: Knowing when to exit a trade is one of the hardest things to do. When forced out of a position violently, it is known as stopped-out. In the case of Enterprise Inns, I presume most bondholders are sitting in profits and are thus immune to selling pressure. Nor are holders in danger of being 'stop-out'. But what is the profit potential for hanging on? Remember that this bond has only got five years left to maturity. The bulk of the gain, I suspect, is already behind us. By selling the bond and returning to cash, investors will have the flexibility of buying more attractively priced bonds in the future, especially if the bond market weakens over the summer.
Dr Jackson Wong
www.fixedincomeinvestor.co.uk is a division of Stockcube Research Ltd which is authorised and regulated by the Financial Services Authority. The research provided by Stockcube on the Website (and any other Stockcube website) is provided solely to enable investors to make their own investment decisions and does not constitute personal investment recommendations. No recommendations are made directly or indirectly by Stockcube as to the merits or suitability of any investment decision or transaction which may result directly or indirectly from having viewed the investment research on the Website or having received it by email. Investors are therefore urged to seek independent financial advice if they are in any doubt. The value of investments and the income derived from them can go down as well as up, and the investor may not get back the full amount originally invested.
Bonds, as with all investments, are subject to price volatility and in the event of a default an investor may lose some or all of his or her original investment. This site also contains references to derivatives. These are particularly high risk, high reward investment instruments and an investor may lose more than his initial margin requirement. Some foreign currency instruments are also featured and if an investor decides to acquire any investment denominated in a currency different from the his or her own, the investor should note that changes in foreign exchange rates may have an adverse effect on the value, price and income of the investment in the base currency.
None of the services provided as a result of this agreement constitutes a personal recommendation to invest from Stockcube and no service should be construed as such. For the avoidance of doubt, where the word “recommendation” is used elsewhere in these terms it does not refer to a personal recommendation, unless this is explicitly stated. The investments described by or in the services are not suitable for all investors. Investors who have any doubt about whether particular investments are suitable for them should contact an independent financial adviser.
These services do not include personal investment recommendations from Stockcube and should not be construed as such. Stockcube may, at its discretion, provide information, advice, recommendations and research to subscribers from time to time on its own initiative or advise subscribers of other services available. Stockcube will be under no obligation to provide on-going advice in relation to financial instruments covered on this website.