This week panic seized the markets and we saw citi's share price crippled by a vote of no-confidence. One begins to rethink if equities remains a viable asset class in this turbulent market.
Market indicators
a) The flight to safety pushed 10-year US bond yields to a 5-year low of 3.02% and the 30-year bond yields to it ever recorded low of 3.49% since 1977. As investors reduced holdings in riskier assets bond prices could strength further and yields fall further.
2-year Treasury bonds fell below 1% for the first time since it was issued in 1976
b) ITraxx Crossover, a measure of risk aversion, measures the credit spreads of junk-rated bonds at a record high of 942 this week.
c) Tips (inflation linked bonds) moves to levels that only make sense if US prices fell, on average, for the next 10 years.
d) Dividend yield on the S&P500 is higher than the yield paid on a 10-year Treasury note.
IS this the pricing for a deflationary Armageddon? or is it a sign for investors with longer term horizon to buy?
Good economic news is likely to take a long time to arrive as central banks prepare to wrestle with inflation and world growth is projected to decline to a miserly 1.1% (IMF criteria for worldwide recession is <>
But looking further into the wider investment universe, there are convertible bonds out there which have been overlooked by many investors. With some due diligence carried out, investors could yield a hefty 15-20% over the next 12 months, which might not be a bad bargain in these markets conditions.
Eric Tan, London
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