Has The World Gone Nuts?

Tyler Durden's picture

Authored by Mark Melin via ValueWalk.com,

The notion that investors are “reaching for yield” when investing in risky sovereign bonds has become too much of a cliché for Macquarie’s Victor Shvets. The problem is that concept provides easy cover, a limp excuse for bond investors making obviously flawed decisions, as was the case during the Petrobras 100-year bond offering. Those same set of circumstances appear to again be taking hold across the emerging market landscape, and institutional investors are falling into the same trap.

While trusted research reports were touting the Petrobras 100-year bond deal, certain investors, most notably Bridgewater Associates, took the opposing point of view. To the world’s largest hedge fund, it was obvious the emperor had no clothes. Despite all the usual suspect consensus analysts gushing over the prospect of 100-year Bond offering with exposure to a scandal-tainted enterprise amid a government with a history of instability, there were mathematical reasons to question the offering.

Nonetheless, “yield-starved” investors piled in – and the result was a tragedy.

The same situation appears to be playing out in far-flung regions of the world such as the Ivory Coast. Investors were lining up outside the door and around the corner to get a chance to purchase bonds yielding 6.25%. The June 2017 sovereign bond offering attracted US$10 billion in bids for US$1.9 billion in issuance for 16- and 5-year exposure to an unstable government.

When evaluating the Ivory Coast investment prospects, the question is: Where in the modeling did it account for default? How much loss potential was factored in when evaluating the potential for a 6.25% annualized return?

Factoring in bond default and restructuring would appear as an obvious consideration by looking at the nation’s history since it gained independence from France in 1960. Shvets categorized the nation as a “state wrecked by coups and civil wars” but more importantly it has been “a serial defaulter.”

It doesn’t take a history major to figure out past bond investments have statistically involved a meaningful degree of default risk. In 2011 it simply stopped bond payments that were issued due to a restructuring of 2010 bonds, which themselves were part of a restructuring of loans made in the 1970s and 1980s.

But it’s not just the Ivory Coast.

Investors are loading up on Iraqi and Greek five-year bonds at 6.75% and 4.63% respectively, making them a relative deal compared to 16-year Senegal bonds paying 6.25% and “serial defaulter” Argentina’s 100-year bond offering that yields 7.92%. While Argentina’s government is currently “pro-market,” that could easily change over the next 100 years – if not the next ten years. But if you don’t want to commit capital for 100-years to a traditionally unstable government, perhaps the slightly higher yield in Ukraine’s ten-year bonds at 7.3% might do – so long as investors ignore its location in the middle of a war zone.

Shvets is flabbergasted. “How can one rationalize such investor behaviour?”

The excuse of investors “reaching for yield” no longer does justice to such investments, he says, pointing to the only logical thesis being central banks being unable to normalize interest rates – or this is just a bubble that will burst like all others.

Pensions and other institutional investors are in a tough predicament. With yields in the developed world knuckle dragging at or near negative on a real, inflation-adjusted basis, there are not many “safe” yield chooses – and the situation might not correct itself. Over the long term Shvets muses that “there is no alternative” to the “unorthodox monetary policies” he sees playing out into “perpetuity.”

But is there "no alternative" to an Ivory Coast bond offering?

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Cognitive Dissonance's picture

The market can remain irrational longer than you can stay solvent.

Perimetr's picture

If you want to assume that it is "investors" driving the market

then you are nuts

Try Central Banks manipulating ALL the "markets"

which are not markets but interventions

no problem to buy everything when you own a money machine.

The banksters can't allow even a small dip or it will trigger a collapse.

jury-rigged house of cards, waiting for the wild card

ByTheCross's picture

Given how long the manipulators have been manipulating (or intervening), one tends to conclude that they are rational, which tends toward the conclusion that they've always been rational.

Therefore, the inevitable outcome must be a rationally planned one.

If you can't see how it could be, then that implies you aren't as fully informed as they are.

E5's picture

Propping up governments is done by Sovereign Fiat pumped directly into bonds.  This is central banks propping central banks for specific "behavior" and corporate deals.  If little people bought this crap then they deserve to be served.

espirit's picture

Hmmm...

Looks like CalPers is gonna take a haircut.

Just Saying.

knukles's picture

I don't see a problem.
Stocks have gone bat shit gang busters through the roof since 08/09, rates have plummeted meaning every last portfolio should have massive gains.  Massive I tell ya'!  Humongoloid.

Talking with one of my Prog buds, retired, CalPers beneficiary whom I'd told 10 years ago was gonna be a problem counseling him to yes, begin taking his pension because then the active recipients would be the .. yadda yadda yadda
So I see him again and say, lookie hearh ... and he says; "My pension is guaranteed by the state of California."

I'm giving up on talking to hard core Progressives and God Help Us, we have Way Too Many of them crazies out here.
Maybe a dimwit (as opposed to means) tested tsunami

giovanni_f's picture

at this point it wouldn't surprise me to hear that the niagara has reversed direction and falls upwards henceforth.

JRobby's picture

The shock will take out hundreds of thousands.

 

yogibear's picture

Central banksters willl print hundreds of trillions to buy up everything.

Their utopia is a VIX of  zero.

E5's picture

Follow the Cash.  The money is made by figuring out WHY central banks and sovereign funds are funneling money to these countries.  There are corporate deals being propped up here and if you can buy that stock you will turn the coin.  Ivory Coast bonds serve to prop an ongoing enterprise.  Figure that out and you can see it is now "less risky".  Argentina, well it is Argentina folks and if we don't keep it afloat do you know "as goes Argentina, so goes....."

philipat's picture

I have only ever been to Cote D'Ivoire once. Unintentionally. The Lufthansa flight I was on, which should have been nonstop from Frankfurt to Lagos (Nigeria) was diverted to Abidjan to evacuate German citizens from the (at that time) latest attempted military coup. When we landed the airport was "locked down" with military everywhere. Luckily the Captain authorised that the bar remain open!!

So with that experience, yes Ivory Coast is just the very kind of stable and secure place that I would invest in?!!

1 Alabama's picture

The gvt/Fed can remain irrational longer than you can remain solvent. Fixed it 4 ya

Nobodys Home's picture

I'll take Ukraine for 7.3% Alex.

E5's picture

Simple stupid funding of a puppet state that the USA recognized illegally prior to the 1 year moritorium.  Hmmmmm who could have bought those "state bonds"?  Certainly not Pootin, Sad-dam, God-daffy, Ass-ad, Error gone, Chavfez, or any of the others the USD has been inflated to destroy.

E5's picture

QE 1 money injected at a 6665 market price.

Makes the market need to be over 17000 at that moment because it is a M3.

After all easing... market needs to be well over 25000.

That folks is not going to unwind short of taking into bankruptcy one private company.  The FED

Apocalypse Wow's picture

“How can one rationalize such investor behaviour?”

I have been trading longer than many people are alive and this behaviour has always been in all markets.  It is said "Do not try to rationalize irrational behaviour", I will add: If you try to rationalize, it will make you an idiot as well.

Do not even try as it could make you as insane as the insanes, you will end up becoming one yourself and suddenly you feel normal.

Being an outlier and profitting from the obvious is the only course of action but with such an abundance of insanity you are swimming upstream and you better have a lot of patience.

Cognitive Dissonance's picture

As long as irrational market behavior is rewarded it will continue. In this case, talk to the central banks about ZIRP, NIRP and excess liquidity.

Gordon_Gekko's picture

Agree 100% and I will add this: The more widespread the idiocy, the better are the opportunities for sane people to take positions in things that will profit when the idiocy collapses of its own weight. The level of idiocy is directly proportional to the gains to be had in anti-idiocy investments.

BUT you have to be DEAD SURE of your analysis of the situation. It will serve as your anchor in the hurricane of idiocy and stupidity.

malek's picture

I only wonder how you are so sure the rules won't be bent before the time comes where you want to take the profits in those things.

Gordon_Gekko's picture

There are no guarantees in life. But it shouldn't stop you from doing what you have to or what you feel is right.

malek's picture

I agree with your second sentence.
But in this case is was about being DEAD SURE - and I'm not dead sure of anything (outside of 100% under my control) anymore.

Gordon_Gekko's picture

These stupid "investors" DESERVE the all the losses and more. There is an alternative - the ONLY one perhaps - but they are too stupid and ignorant to see it: PHYSICAL GOLD AND SILVER.

wise_owl_says...'s picture

if it is not in your possession, you don't own it. when market is up, all so ready to sweep profit. when market is down, same scum want others to finance it.

Gordon_Gekko's picture

This is good though. This idiocy is the manure that will flower phycal PM's in the future. Keep going and keep buying shit, especially shitcoins.

Yellow_Snow's picture

They ASSume that Govment gonna Protect Um

Dragon HAwk's picture

If they can't pay you back today, what on earth makes you think they will be able to pay you back in a year.

Lost in translation's picture

Yes.

I came here for the Double-Double.

But I stayed for the crazy.

Rebelrebel7's picture

Yes. The world has gone stark raving mad. That is the only thing that I am currently absolutely certain of regarding life on earth.

VWAndy's picture

 They will make it up on volume. Or is it valume?

armageddon addahere's picture

You can usually buy these dodgy bonds and hold them for the generous interest, for a couple of years. Then sell before they default. It's a well worn scam that has been going on for hundreds of years. It's a kind of Ponzi scheme. These serial defaulters keep borrowing more money and paying the interest as long as they can keep bringing in more new money than they have to pay out. When they have so much debt the interest eats up too much of the new borrowing they default and wipe the slate clean, then start again. Canadian banks used to specialize in these loans but somehow they always got out before the shit hit the fan.

Ryland's picture

Did Petrobras default? I remember hearing that they were close but I thought that they never did and bond prices have risen since then?

Ryland's picture

Did Petrobras default? I remember hearing that they were close but I thought that they never did and bond prices have risen since then?

PontifexMaximus's picture

should be a nobrainer for a CB to buy up this bond: you squeeze the short sellers, and, in case the brazilos do not want to pay, you send them via IMF down to hell. where is the problem?

PontifexMaximus's picture

BTW, the price today is around 95%, so, where is the problem?

Rebelrebel7's picture

Gee, a world that revolves around murder for profit through war and the medical establishment, surveillance to make sure that nobody talks about the establishment's corruption, and a privately owned international banking system that has held the world up in a stick-up for $80 trillion ? Oh, is that crazy, evil, or both?

espirit's picture

The behavioral odds suggest it's much worse then that.

Bueller?

Boris?

Rebelrebel7's picture

Correction, $225 trillion IIn global debt with $60 trillion in global sovereign debt.

Pollygotacracker's picture

The low rate/no rate environment in the devloped countries have encouraged the risky behavior. There should be honest market rates. The CB's are to blame for so much that is wrong. 

Francis Marx's picture

So make them 100 year bonds. Make them 1000 year bonds.

No country is ever paid off its debt.

So whats the issue? As long as a person can unload them at anytime to another sucker.

assistedliving's picture

OPM.  No one will shed a tear for rent seekers losing money. 

The problem is when the SHTF they're made whole by the rest of us. 

Until TPTB take real hair cuts, and often...move on.

BSHJ's picture

There is a reason the acronym is TPTB and not TPTBTH....Take Haircut is NOT part of their plan

BSHJ's picture

If all the US pensions would move their money to any/all of these 'investments', then the 'pension problem' would be solved!  Woo-hoo....6.75% for LIFE (or default, whichever comes first)

Grandad Grumps's picture

The conditions required for a sane and equitable world do not curently exist. However, the bible says that the bad souls will be confined and unable to come back to earth for 1000 years. During that time, the good souls will be able to develop sufficiently to properly balance the bad souls.

I am really not sure that this will happen in our time, but we are "now" being treated to an exceptional amount to revelations (truth) and the bad folks seem to be f*cked unless they can pull a demon out of their ass.