Unglamorous market yields glittering gains

TERRY HALL
Last updated 08:49 08/04/2013

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OPINION: Poor old business reporters and our cobbers didn't have a chance.

Pretty women ignored us at financial gatherings in the heyday of the 1980s' sharemarket boom: sensibly zeroing in on people like Bob Jones, Ron Brierley or Bruce Judge instead.

This proved how attractive money was - and these chaps were considered to be wizards with the magic touch to make fortunes for themselves and their shareholders.

What amused me - and still does - was that while the eye- catching women rationally ignored us - rightly guessing journos rarely have money and were only there for work and a drink - their cash-sensing radar wasn't so acute in assessing some others present.

These were unobtrusive chaps with real wealth who might have been equally good catches.

Nothing changes. Again there are people you wouldn't look at twice, but who have been making a killing investing in what many regard as the most boring of the financial markets.

No, not shares (where a lot of money has been made lately) but in the unglamorous world of fixed interest and bond market trading.

Most investors buy a bond - say a five-year term investment with the ANZ Bank or Fonterra - and forget about it.

One day they are advised it has matured and the money has been deposited in their bank.

So they ring up a financial adviser and try to find something similar to invest in.

Thanks to rapidly changing financial markets, this is becoming increasingly difficult.

Cheaper money available elsewhere means banks are paying back fixed-term bonds at the first opportunity, and few companies are issuing new debentures and bonds.

Increasing scarcity is forcing up interest in what is left.

This has created a chance for some punters - like those the pretty fortune hunters overlook at parties - to make a killing.

Securities in the bond markets are traded like shares.

Investors' circumstances change - cash is needed for a home, or a relative dies and an estate needs to be wound up, requiring bonds and shares to be sold. Many institutions are required to hold bonds, and trade them regularly.

The stock exchange's fixed- interest markets match buyers and sellers for new and existing bond issues. Like shares, the values of bonds change regularly, depending on economic conditions, yields and how secure they are perceived to be.

AGOOD example is Credit Agricole, the French bank.

This bank had no trouble raising $500 million, much from small Kiwi investors, in 2007 in an issue of perpetual notes that offered an interest rate of 10.04 per cent. Many holders of these New Zealand registered bonds won't have been aware of how they slipped in value as fears mounted over the security of the entire European banking system.

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Had someone, who had paid $1 for each note when it was first issued, tried to sell it last year they would have got back 39 cents ( a loss of 61 cents) though the bank continued to pay interest at 10.04 per cent. The grim outlook encouraged many to sell.

But others took a punt.

As signs mounted that Europe and France had got through the worst, the perception of the bonds' value improved.

They have risen to 62 cents, a hefty gain of 23 cents a unit.

Anyone who bought at 39 cents was getting a real return of 25 per cent based on the $1 face value of the notes.

In November, Credit Agricole, as scheduled in its first five-year interest rate review, recalculated the interest rate to 5.04 per cent.

This reduced the yield for those who bought at 39 cents to a still handsome 12.9 per cent.

People who buy at 62 cents are effectively getting a return of 8.1 per cent. While unlikely, if Credit Agricole decides to repay the notes early, they would get the original $1 back. However, 8.1 per cent is an unusually high return in today's market: a sign that they are still considered risky.

Cyprus is a reminder that the European Union's economic problems are not over.

Dutch co-operative bank Rabobank was also rushed in 2007 when it raised $900m in a similar perpetual bond issue offering 9.48 per cent. It was the biggest non- government issue ever made here.

Rabobank was cleverer than Credit Agricole, however.

From the start, it recalculated the interest rate annually; it has steadily dropped to 3.32 per cent.

This caused the price of the bonds to fall steadily to 74 cents last year. Lately they have risen to 86 cents. Encouraging this has been speculation Rabobank may repay the original dollar investment in October, due to changes in Reserve Bank regulations.

However, most observers discount this, instead expecting Rabobank to repay it in October 2017 for technical reasons including changes in Basle banking agreements.

Rabobank is a major borrower in this market and it is thought it would enhance its high standing to repay these notes then.

They are popular: at 86 cents buyers get a running yield of 3.8 per cent. If those punting they will get the original dollar back in 2017 are right - and it is a punt - First NZ Capital calculates their gross return would jump to 7.8 per cent.

Their return could be even higher, if short-term interest rates rise before then.

- BusinessDay.co.nz

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