Relative Value

The Daily Update - Buy Cheaply, Pay Dearly…. Not in this Case

The Daily Update - Buy Cheaply, Pay Dearly…. Not in this Case

Aside from favouring investment grade bonds from what we at Stratton Street deem ‘Wealthy Nations’ (NFA ranking above 3 stars), one of our most important criteria for inclusion in the investable universe is risk-adjusted relative value. A great example could be a bond issued by Singapore’s holding company, Temasek 5.375% 2039. Using our proprietary Net Foreign Asset Model, we calculate that Singapore is wealthy, with NFA exceeding 200% of GDP, thus achieving the highest, 7 star ranking. State-owned Temasek in-turn is rated AAA by both Moody's and S&P. In terms of risk adjusted relative value, we calculate that the USD bond maturing in 2039 offers an expected return and yield around 9.2%; thus cheap.

Wealthy Nations Daily Update - Yellen and Relative Value

After a couple weeks of hawkish comments from Fed members, Fed Chair Yellen stepped out for the first time since the last FOMC meeting mid-month and remained true to herself; maintaining her dovish credentials. A cautious approach in adjusting policy was the theme of her speech which she delivered at the Economic Club of New York yesterday. She highlighted that a cautious stance is “warranted because, with the federal funds rate so low, the FOMC's ability to use conventional monetary policy to respond to economic disturbances is asymmetric”. Like us, she noted that domestic inflation is “somewhat more uncertain” adding that although there have been signs of pick-up, US economic indicators remain “somewhat mixed”. With increasing global uncertainty, Yellen even discussed the central bank’s “considerable scope” to ease if the economy falters, “we used them effectively to strengthen the recovery from the Great Recession” and would do so again, adding that “only a modest degree of additional stimulus” can be provided.

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