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October 20, 2015 at 12:45 PM
Forget oil, copper and wheat. Commodities traders are crowing about the money to be made in the bond market.
On the cocktail party circuit at the industry’s LME Week earlier this month, at least a dozen traders and executives said that the surest profits these days was in debt issued by their employers and their very own rivals: Glencore Plc, Louis Dreyfus Commodities BV, Trafigura Pte Ltd. and Noble Group Ltd.
Take $1.25 billion of Glencore notes maturing this month: the yield surged to a record 32.3 percent on Sept. 29, up from less than 2 percent in early September. Buying $1 million worth of the bond that day may generate in excess of $35,000 in profit in less than four weeks if Glencore repays the notes by maturity on Oct. 23.
Bonds got sucked into the same vortex that sent Glencore shares plunging 30 percent in a matter of hours on Sept 28. Even as yields surged, traders said the turmoil hadn’t shaken the backing of the lenders who financed the industry, suggesting the bonds were a safer bet than the markets had priced in.
“The bonds of the trading houses were extremely cheap,” said Graham Sharp, an adviser to consultants Oliver Wyman & Co. and co-founder of oil and metals trading house Trafigura. “This was an anomaly.”
While the natural resources industry is battling the worst drop in prices since the global financial crisis, traders — particularly in oil — are benefiting from the pick up in price volatility.
Not only traders, but the firms themselves have been buying back their own debt. Gunvor Group Ltd. last month completed the repurchase of the commodities trader’s $500 million debut bond. The yield on the notes peaked at more than 14 percent in December after the U.S. imposed sanctions on co-founder Gennady Timchenko. The Russian billionaire sold his stake one day before the sanctions were announced.
To be sure, traders have an interest in getting their bond prices higher. Glencore’s longer-dated bonds are still some way from a price commensurate for a company with an investment grade credit rating. For example, its 1.25 billion euro-denominated bonds maturing in 2021 are quoted today at about 77 percent of their face value.
That reflects concern about the long-term prospects of the business. Credit-default swaps insuring Glencore’s debt against default within five years surged to a more than six-year high of 882 basis points on Sept. 29 from 300 basis points earlier in the month. The contracts now cost about 649 basis points, according to CMA.
