Bond Outlook November 28th

The “Tuesday effect” has struck again, as if, every week, the mood of stock markets (but not of bond markets) turns momentarily positive, usually on the basis of some item of good news and despite the black picture overall. This week the “good news” was the USD 7.5 billion purchase of hybrid bonds in Citigroup by the Abu Dhabi Investment Authority suggesting that confidence in financial institutions may be returning. The deal is complicated, with the ADIA facing mandatory conversion, and the conversion ratio decreasing as Citigroup’s share price increases, however, does a yield of 11% suggest a return of confidence? Is there not an element of desperation (one analyst estimates the deal will reduce earnings by about 5% next year) in the world’s biggest bank accepting a Mideast sovereign wealth fund as its new largest shareholder with scarcely a murmur from US authorities? The authorities only require approval for a 5% holding -- ADIA is at 4.9%, and largest shareholder until this deal was Prince Alwaleed, not officially a sovereign wealth fund, but in Saudi there is little difference between state and ruling family).