HSBC and US Bond Market

I have emphasized many times (in Hong Kong Economic Journal Forum) about HSBC already. From the current announcement, HSBC's latter half of 2008 and 2009 Q1 results can be expected.

The most serious part is the cash outflow through withdrawal by clients. The other serious part is the actual cash outflow to financial asset losses (means it must have owed the counter-parties debt - can be obligations to CDS and other tools).

Since the drops of US property market, now spreaded even to property management for commercial and retail purpose properties, have not ended and will only worsen, HSBC, actively involved in the US property market, will only get even worse.

NONE OF THE TIME NOW, NO MATTER AT WHAT PRICE, IS THE PURCHASE TIME.

A POTENTIAL FINAL TRIGGER ON ANOTHER BIG DROP MAY HAPPEN BEFORE THE KICK-OFF OF THE EXISTING PRESIDENT, CEO, AND SENIOR MANAGEMENT.

But after their step-down, light may shred to HSBC.

On the other hand, US bond market may not really burst as early as HKEJ other writers had predicted. The key reasons are:

1. China and Japan, combined together, only held about 1,158b USD US debt (totalled 10,890b USD), while US domestic market, government and public, have already hold 6,289b USD US debt (according to US treasuries data as per Jan 12, 2009). The sensitivity of China + Japan, by 1% drop, can only affect 0.1% percent of total USD debt, while US domestic can affect by 0.57% percent of the total. The signficant is not comparable.
2. What are the substitutes to US debt? Euro and GBP assets are in more troubles. JPY asset is not attractive; rise on JPY is due to unwinding. AUD and NZD have dropped by large percentage due to weakened raw materials demand. CAD relies on US too much. RMB is not a hard currency. Gold has both the role of alternate currency and commodity: while the former role makes gold attractive, the latter position offsets quite a degree of gold's value. Under the absence of the best substitute, US bond will still have demand.
3. Obama's office will certainly need to bail out some other firms. A method is to purchase the corporate bonds to inject money. Before the implementation of this strategy, as well as the turn around of US economy, Obama's government will not have sufficient gut to burst this bubble.
4. The bid/cover ratio shows that at reasonable discount rate/coupon rate, UST are still favored by the investors.

For sure UST will subject to a risk of deep adjustment on prices had Obama's government issued new treasuries at large discount and large amount. It is not wise to purchase the treasuries now (the timing has gone). However, calling it "collapse" is a sensational claim more than a refined analysis.