Our opinions - as we form them

 

 

Welcome to BondTalk – Kames Capital’s dedicated fixed income blog.

It provides regular insight into the ideas, debate and opinion behind our portfolios and strategy, straight from the fixed income desk.

Comments are illustrative not portfolio specific; the blog’s purpose is to be relevant, thought-provoking and interesting.

 

Who pays?

Who pays?

There is a sigh of relief in markets as the long Easter weekend approaches. Sadly, too many are suffering or worse from the cursed virus and many millions of key workers will be providing support to ensure “the lights stay on” for the rest of us.  However, we know...

Bank of England purchases – why so fast?

Bank of England purchases – why so fast?

In times of crisis, we now know the playbook by policy makers. Governments will spend it and the Central Banks will buy it. The more “control” (or as they would call it “coordination”) that these two arms of policy have, the more effective it is. In the UK, we have...

Even Angels Fall

Even Angels Fall

The European high yield market currently has €221bn of debt outstanding in the BB-rated space, representing 70% of the BofAML European High Yield index. If you look at the amount of debt that has fallen into the European high yield space on any 12-month rolling period...

…nobody thought that…

…nobody thought that…

“Why did nobody see it coming?” was the question Her Majesty asked in 2008 of the financial crisis. From an investment perspective it is always good to review successes AND failures. The phrase “nobody thought that…” has been used in our virtual conversations many...

BoE buying is a timely boost for the corporate market

BoE buying is a timely boost for the corporate market

Those with a good memory will recall that the Bank of England’s last significant attempt to buy corporate bonds was in the aftermath of the 2016 EU referendum. It took them several months to build up a £10bn portfolio, finally finishing in April 2017. From an...

Funding to stay afloat

Funding to stay afloat

Carnival Cruise Line is in the market looking for $4bn of funding to shore up their balance sheet. With the current restrictions in place regarding sailing, the business is in desperate need of liquidity to stay afloat. The company initially came to market with a...

A month to make your head spin

A month to make your head spin

As you will have read, we have had one of the most dramatic (in speed and magnitude) three weeks of sell-offs in global markets, as Covid-19 fear spread globally and literally drove the world economy to a standstill. As people panicked, markets did too, hitting the...

Picking our way through the rubble

Picking our way through the rubble

There was an explosion in financial markets at the start of March; major economies literally shut up shop due to Covid 19 fears.  The emergency services arrived swiftly (albeit day by day it didn’t feel like it). The Fed and the Bank of England cut rates twice, the...

Another emotional week for Mr Market

Another emotional week for Mr Market

Doubtless many readers will be familiar with Mr Market, who was an allegorical figure invented by renowned investor Benjamin Graham. Mr Market swings from pessimism to optimism with alarming and unpredictable frequency. On Monday morning, Mr Market’s pessimistic...

The most incredible week

The most incredible week

The most incredible week. More liquidity, fiscal support and forbearance than in any week, ever. Globally, responses have ranged from cheques in the post to government salary subsidies; central banks have shaken off reluctance to reveal largesse. Beneath the economic...

The week that changed everything (again).

The week that changed everything (again).

10 year Gilts, it seems incredible to say, ended the week more or less unchanged at 37bps. In the meantime the FTSE 100 lost over a 1000 points or around 17%. It might not seem like the most stunning event of the week but the inability of rates markets (risk free)  to...

Debt and assassinations

Debt and assassinations

Julius Caesar was famously assassinated on the Ides of March and Shakespeare further immortalised it in our memories with ‘Beware the Ides of March’. But, this specific day (March 15) was also a deadline for settling debts in Roman times (Caesar paid the ultimate...

Portfolio immunisation from coronavirus

Portfolio immunisation from coronavirus

To be clear, there are no winners if coronavirus continues to spread. However, as bond investors it behoves us to make a realistic assessment of how assets will perform under a pandemic scenario. This then allows us to take prudent steps to immunise portfolios as far...

Kraft Heinz in a pickle

Kraft Heinz in a pickle

The “57 Varieties” on ketchup bottles mean nothing – Henry Heinz simply thought it was a lucky number….. Shortly after the Kraft Heinz merger was completed in 2015, the company issued approximately $12bln of new debt in the credit markets to help finance the...

BOND awards 2020 – and the winner is……

BOND awards 2020 – and the winner is……

To celebrate 40 years of the BRIT’s, Kames Capital make four special awards to commemorate the occasion. The Samantha Fox / Mick Fleetwood gong for least successful combination - the duo co-presented the awards in 1989 in what has widely been acclaimed as one of the...

Inflation and rates – going viral

Inflation and rates – going viral

At the time of writing, the number of new cases of Coronavirus are still increasing, although the pace is thankfully declining. This is widely thought to be as a result of the measures taken in China to prevent people mixing with each other such as enforced and often...

Will the new boyfriend be any more reliable?

Will the new boyfriend be any more reliable?

The Bank of England had the opportunity to cut rates on Thursday and chose not to. Their economic assumptions can only be described as grim, and yet still they chose to leave interest rates unchanged. To put their forecasts in context, the BoE has 0% GDP growth...

High yield outlook 2020

High yield outlook 2020

Given how 2019 started, and how different the world felt back then, few people backed high yield, and even fewer would have predicted that the year would turn out to be one of the best on record in terms of returns delivered by the high yield market.  Global high...

Monstrous bond supply

Monstrous bond supply

Henry Frankenstein: “Look! It's moving. It's alive. It's alive... It's alive, it's moving, it's alive, it's alive, it's alive, it's alive, IT'S ALIVE!”* The bond market enjoyed a record breaking year in 2019 in terms of the quantum of bonds issued globally. And...

Investment grade bonds outlook 2020

Investment grade bonds outlook 2020

2019 will comfortably claim the record for corporate issuance in euros, with the first 11 months of the year materially eclipsing the entire figure for 2018 (€370 billion compared to €265 billion). The insatiable appetite for corporate treasurers to issue debt has...

Avoid the sting in the BB’s tail

Avoid the sting in the BB’s tail

It’s often said that valuations in high yield bonds are expensive. Yes, this is true to a certain extent. High quality, defensive companies that are BB-rated (the ‘highest of the high’ in high yield) are indeed trading with very tight spreads. This is partly due to...

De-risking from equities into high yield

De-risking from equities into high yield

Clients often push back on allocating to high yield as they deem it the highest risk part of the fixed income asset class and don’t give it much more thought. It’s a question I get in almost every client meeting – why high yield, and why now?There are a couple of...

A healthy source of new issuance

A healthy source of new issuance

The inclination to form an overarching view of the broader healthcare industry can be premature and costly. Understanding the drivers of the various sub-sectors (pharma, biopharma, medical technology, drug distributors) helps investors avoid any potential landmines...

Who’s afraid of President Warren?

Who’s afraid of President Warren?

Whispers are growing louder about a potential collapse in US equity markets this time next year – the days following the 2020 presidential election. Why are capitalist alarm bells ringing? Senator Elizabeth Warren, rather than early favourite Joe Biden, could be...

Talking high yield (video)

Talking high yield (video)

Kames Head of High Yield Thomas Hanson discusses the competing forces of sustained central bank support versus the deterioration of macro-economic data on the high yield market.

A cut, but little guidance

A cut, but little guidance

As expected, the US Federal Reserve cut interest rates again yesterday. In total, the US Federal Reserve has cut 75bps this year, almost completely reversing the hikes of 2018; the target range for US Fed Funds now stands at 1.5-1.75%. The committee remains split,...

Auto consolidation evidence of a challenged industry

Auto consolidation evidence of a challenged industry

This week’s confirmation that Fiat Chrysler and Peugeot have approved a possible merger, to create what would be one of the world’s largest auto groups, is no surprise. Fiat had been in merger discussions with Renault earlier this year, and this is the continuation of...

Talking Bonds (video)

Talking Bonds (video)

What’s our fixed income strategy for the next month? With central bank cuts and softening macroeconomic data influencing bond markets recently, one of our Fixed Income Fund Managers, Colin Finlayson has given us his insight in to the main areas of focus for the Kames...

Government bonds: the new normal?

Government bonds: the new normal?

Government bond markets used to be conventional. Macroeconomics departments at prestigious universities all taught the ancient (given the short history of economics) orthodoxy of GDP, inflation, current account balances and unemployment all determining government bond...

The myth of the equity cushion

The myth of the equity cushion

A margin of safety is a wonderful thing for a company. It could be an unassailable market position, an industry-leading level of competitiveness or similar. As investors, we love margins of safety. It gives us confidence that companies can overcome challenges and...

Thomas Cook fallout

Thomas Cook fallout

The loss of Thomas Cook from the high street should see TUI the marginal winner, the sole remaining tourism company with any significant retail store base. In the UK, Thomas Cook had an 8% market share compared to TUI which has 19%; in Germany, Thomas Cook had a 10%...

The ECB sheds more light on the September Meeting

The ECB sheds more light on the September Meeting

On Monday, the ECB’s Chief Economist Philip Lane gave a speech. Given the timing, so soon after the September policy meeting, it was no doubt crafted as an opportunity for the ECB to clarify its message in light of the market reaction. It is the Governing Council’s...

How will the Swiss react to the ECB

How will the Swiss react to the ECB

The Swiss National Bank meeting this week will be more closely watched by markets than usual. Typically there is little drama stemming from the safe-haven alpine nation. But with inflation threatening to fall through zero, an appreciating currency and the ECB having...

ESMA weighs in on bond liquidity

ESMA weighs in on bond liquidity

H2O, GAM, Woodford. Three fund managers that all faced crisis due to liquidity. Or rather, a lack of it. It’s not surprising, therefore, that the trade press has been filled with panicked comment on bond market liquidity. Last Wednesday, the European Single Market...

Corbyn Proofing

Corbyn Proofing

Anyone who says they can predict the future of British politics at the moment is overconfident, ignorant, or trying to sell you something. The best we can say is that the relative probabilities of each outcome seem to be unusually balanced – or in plain English, that...

Smoke signals from an unloved sector

Smoke signals from an unloved sector

Only a little over a decade after going their own way, Altria and Phillip Morris International (PMI) might be getting back together. The announcement will be welcome news to the investment banking community and to those looking for some distraction from near-constant...

The polar fortunes of Austria and Argentina

The polar fortunes of Austria and Argentina

Austria and Argentina may be alphabetically close, but economically they are at opposite ends of the spectrum. Much has been made in recent weeks of the exceptional performance of the 100-year Austrian government bond. Year to date returns have breached 80%; not what...

HSBC sell-off: A buying opportunity

HSBC sell-off: A buying opportunity

Credit markets widened last week on the back of a weaker macroeconomic backdrop, increased trade tensions between the US and China, and political turbulence in the UK and Italy. This was exacerbated by the escalation of protests in Hong Kong, which in particular led...

Bank of England QE – the resurrection?

Bank of England QE – the resurrection?

Flying under the radar of the recent “Super Thursday” Bank of England announcements was the news that the Bank is about to start buying corporate bonds again. As investors ponder whether the European Central Bank will restart its CSPP (Corporate Sector Purchase...

A turgid dialect of English

A turgid dialect of English

My colleague Sandra Holdsworth often comes up with real gems in her observations of the market. This week she said “central bankers should do their market communication in a foreign language”. After mulling this over I think she has a point! Way back in the 1950s it...

Deutsche – finally a case for cautious optimism

Deutsche – finally a case for cautious optimism

There have been a number of Deutsche Bank restructurings in recent years, but the most recent one announced last week finally make sense. For too long it has been a bank without a coherent business model or disciplined capital allocation. Exiting unprofitable...

I hope you like a fan chart!

I hope you like a fan chart!

The last two speeches from Mark Carney and Gertjan Vlieghe makes me wonder if the Bank of England (BoE) are preparing us for a change to come at the August Monetary Policy Committee (MPC) meeting. BoE economists factor-in both government policy and market-based...

DS Smith: Game, Thermoset and Match

DS Smith: Game, Thermoset and Match

As we make our way through the closing week of Wimbledon, most of the initial competitors will be home or making their way back. However, the stands will remain at full capacity and the traditional heavy consumption of strawberries and cream will continue unabated. So...

€6.75trillion should do it!

€6.75trillion should do it!

The Eurozone is very much expecting some further monetary stimulus. Whether it’s July, September or later remains to be seen, but both the timing and the quantum will be key. Whilst a deposit rate cut is firmly on the cards, the size of potential bond purchases is up...

When liquidity dries-up

When liquidity dries-up

Suddenly the fund industry is talking about liquidity – or lack of. Most investors will have read about Woodford Investment Management’s well-publicised challenges around managing redemptions, which led to the suspension of dealing in one of the company’s funds. Then...

Save the whale

Save the whale

When President Trump recently met with Prince Charles, the “Prince of Whales”, one quote taken from the subsequent interview of Trump struck me: “He wants to make sure future generations have climate that is good climate, as opposed to a disaster, and I agree.” This...

(G)Rate expectations

(G)Rate expectations

Expectations are building in the bond markets that the US Federal Reserve is about to embark on an easing cycle starting in July, and market pricing suggests that rates will be 0.75% lower by year-end than at current levels. To date, Chairman Powell has given little...

Greece is the word (and Italy isn’t)

Greece is the word (and Italy isn’t)

“Italy will not be another Greece” said former Italian Prime Minister Matteo Renzi in July 2015. Nearly four years later their sovereign debt markets show that they may be closer than ever before. Italy can borrow for five years at a rate of 1.85% and Greece can now...

Scream if you want to go higher?

Scream if you want to go higher?

The inflation-linked bond or “linker” market may seem like the slightly strange little cousin to the main gilt market – everyone knows it exists, but mostly ignore until it does something outrageous. At the moment it is screaming! Over the next two years, the...

All Eyes on the Bank of England

All Eyes on the Bank of England

May 2019 could go down in the history books as the moment when UK politics really changed - the month where the two dominant political parties lost their way. Whilst the political risk gauge has certainly increased post-European elections, financial markets have been...

Fuel-hardy plans for utility nationalisation

Fuel-hardy plans for utility nationalisation

The spectre of nationalisation of the water and energy sectors under a Corbyn government has reared its head again. Labour recently firmed up their plans to nationalise the energy sector with the release of a document entitled “Bringing Energy Home”. Perhaps the...

Fly, fly away

Fly, fly away

Thomas Cook bonds are trading in the low 30s (from being at 102 a year ago), with the equity off 90%. One broadsheet news outlet cited ‘Brexit is to blame’ – it seems like Brexit gets the blame for every woe at present. Brexit is most certainly not to blame this time...

UniCommerz; no…CommerzING; no…what?

UniCommerz; no…CommerzING; no…what?

We’ve previously commented on the now failed merger saga between Commerzbank and Deutsche Bank; there are now fresh new press rumours this week linking Commerzbank with both UniCredit and ING Groep. We struggle to see either strategic rationale or real-world...

Consenting to change… at a price

Consenting to change… at a price

Prudential plc is a well-established UK insurer, with a growing international operation in the US and Asia. The company announced significant changes to its business in March 2018, with plans to spin off its UK insurance and asset management business into a new...

European Elections: nothing to see here?

European Elections: nothing to see here?

Financial Markets often become fixated with elections, some more than others. The upcoming European Union elections will choose 751 MEPs to the European Parliament, which along with the European Commission and the Council of the European Union forms the tripartite...

Can ESG help you spot an impending bankruptcy?

Can ESG help you spot an impending bankruptcy?

Environmental, social and governance factors are no doubt important considerations when analysing a business. But I expect that many would say that when it comes to a business going bankrupt, that’s all down to the cold, hard numbers. While that may be true,...

Electric Dreams

Electric Dreams

This is an important moment for Volkswagen’s e-mobility drive. Emerging from the wake of the diesel scandal and under pressure to meet stricter EU emissions regulations, the company has an ambition to sell as many as 3 million electric vehicles per year by 2025. To...

Ad Break

Ad Break

ITV posted first quarter numbers that came in-line with their guidance. We’ll all be aware of how TV markets have been disrupted by changes to viewing habits, caused by online streaming and the provision of “on demand” services from alternative providers such as...

One bride, a few suitors and a keen match-maker

One bride, a few suitors and a keen match-maker

Commerzbank reported better than expected results yesterday. Now, “better than expected” doesn’t necessarily translate to “good”, with Commerzbank once again seeing top line revenue pressure from the low interest rate environment and intense competition in the...

Goodbye Akihito, hello Japanification?

Goodbye Akihito, hello Japanification?

As Emperor Akihito abdicates and Naruhito assumes his father’s role, we thought a review of the Japan and the UK since 1989 might be interesting – the year in which Akihito became Emperor. First, of course, Akihito’s puny 30 years at the helm rather pales in...

McLaren’s road to success

McLaren’s road to success

You may have seen, but for those who haven’t, McLaren recently released their full year results. And good for them, the niche supercar-maker is speeding ahead with ambitious growth plans that are now reflected in their results. Compared to the previous year, car...

US Housing data – a cause for concern?

US Housing data – a cause for concern?

Housing data is perhaps second only to the US yield curve as a cause for alarm bells to be ringing throughout investment houses over the health of the economy. Much has already been said of the fortune telling abilities of yield curve inversion. In the US housing...

ADT – Don’t be alarmed

ADT – Don’t be alarmed

This week ADT Security Corp, the provider of home security services and alarm systems, came to the market to refinance some of its higher coupon unsecured debt (their 9.25% 2023’s). The company was looking to do this through a mixture of 5-year and 7-year secured and...

Year of the Pig

Year of the Pig

Headlines so far aren’t doing this year’s zodiac much justice; live hog prices have spiked as China battles the repercussions of African swine fever. There is no vaccine for a disease that is highly contagious and fatal to pigs, though thankfully not humans. About 1...

Still feeling lucky…?

Still feeling lucky…?

In an economic sense, Australia has often been referred to as the “lucky country”. This, after all, is the country that has not been in recession (defined as two consecutive quarters of negative growth) since 1991 and who, by all accounts, had a “good crisis” while...

A tale of two debt mountains

A tale of two debt mountains

In the second half of 2018, the increase in BBB debt became a thing. “Look at how BBB debt makes up almost half of the corporate index now” became a thing to worry about. It suited the narrative around wider credit spreads, weaker equity markets, higher US rates; a...

The race to the top, but to win what?

The race to the top, but to win what?

Bain & Company recently released their 2019 Global Private Equity Report and within it I found some interesting data points. In particular, the below chart jumped out at me. What do you anticipate to be the biggest challenges for PE dealmakers in 2018?...

Time for active winners

Time for active winners

As QE withdraws and global growth slows down, high yield bond manager, Mark Benbow’ tells us why he thinks this is a great time to generate alpha. Listen to his podcast below.

Safe as houses?

Safe as houses?

Last year, I wrote about the risks for investors in housing association (HA) debt of the significant increase in housing development for outright sale that many HAs are undertaking. This risk has recently come in to focus following the latest trading update from...

Santander: The ‘Old’ Normal, and the Pundits

Santander: The ‘Old’ Normal, and the Pundits

“If everybody minded their own business, the world would go around a great deal faster than it does.” The Duchess, Alice in Wonderland by Lewis Carroll I have been watching with amusement the recent swell of opinion from various market participants regarding Banco...

Is there going to be a Dutch Auction?

Is there going to be a Dutch Auction?

Last Friday, news broke that Brookfield Asset Management was speaking to Dutch pension funds to try and engineer a takeover of KPN, the Dutch telephony company. This follows a move by Macquarie last year to achieve a similar deal to buy TDC (a Danish telecom company),...

Price caps: Burnt fingers?

Price caps: Burnt fingers?

Here in Scotland it was recently the season for Burns’ supper celebrations. In case you haven’t had the pleasure, the haggis, neeps, and tatties are usually accompanied by whisky (preferably lashings thereof) and readings of the native bard’s poems. I cannot hear the...

Don’t blame the Algos

Don’t blame the Algos

According to a recent report in the Wall Street Journal, “Roughly 85% of all trading is on autopilot—controlled by machines, models, or passive investing formulas, creating an unprecedented trading herd that moves in unison and is blazingly fast.”  Think “Synths” from...

Blinking Brexit

Blinking Brexit

There is a danger in writing about Brexit that the article is out of date before it hits the screen, but I‘ll have a go anyway.  At the time of writing, the way forward for the UK and the EU still appears exceptionally unclear. The “backstop” is the main issue of...

You can’t escape the truth – fundamentals matter

You can’t escape the truth – fundamentals matter

Years of a beta-driven market rally have let some get away with forgetting about corporate fundamentals. But central banks are no longer buying corporate bonds en masse, liquidity is being withdrawn, and interest rates are beginning to rise. It seems that the markets...

UK Retail – a new year, but familiar struggles

UK Retail – a new year, but familiar struggles

The British Retail Consortium reported that December 2018 was the worst December sales performance for a decade, with total retail sales showing 0% year-on-year growth during the month. We’ve had a number of Christmas trading updates from UK retailers in the last few...

Loans and your liquidity

Loans and your liquidity

2018 was not a pretty year for financial markets with most assets classes recording negative returns. Thus, for 2018, ‘smart’ selection meant investors “should” have chosen leveraged loans. The theory goes that rising interest rates will generally hurt (fixed coupon)...

Tick Tock Goes the Klöck

Tick Tock Goes the Klöck

Climate change and general concern for the environment, they’re an ever-increasingly important issue for society, so why would it be any different for investors? It isn’t. This is something we’ve been watching for a long time; our ethical franchise will have been...

Harnessing the Power of the Pull to Par

Harnessing the Power of the Pull to Par

“Aren’t you limiting your investment universe?” “Don’t shorter dated bonds have less yield?” It’s common for questions like this to be asked when you’re talking about the short dated high yield asset class. And yes, it’s undeniable that both can be true, but it’s also...

Supercalifrag-heuristic-expialidocious

Supercalifrag-heuristic-expialidocious

Heuristics are simple efficient rules that we all use on a daily basis. We have all learned these through experience, and often they aid our decision making. They are especially helpful in making decisions with the limited resources we all have, particularly in terms...

Junk defence

Junk defence

Well that escalated quickly!  2018 has been a torrid year for most financial assets as they try to adjust to the last decade’s dominant monetary policy regime - Quantitative Easing - reversing direction towards a more “normal” setting.  From the usual suspects of...

Volkswagen drives price

Volkswagen drives price

Most things in the bond market have an analogy with cars. So when a car manufacturer’s sticker prices are slashed, don’t expect second hand car values to look too perky. Same for bonds; as we saw this week with Volkswagen’s jumbo $8bn deal. Thus, one of the most...

If a picture paints a thousand words

If a picture paints a thousand words

At times, an image is better than 1,000 words …. Source: US Bureau of Labor Statistics. For the first time in 18 years, the number of job openings (JOLTS – blue line) in the U.S.A. has surpassed the number of unemployed people in the labour force (orange line) The...

New steps in social housing

New steps in social housing

The UK needs more affordable housing. In 2017 there were 1,155,285 households on local authorities’ housing waiting lists in England alone. Development of new council housing has fallen off a cliff over the last half century and councils no longer have the resources...

ReWard your investment not your doctor

ReWard your investment not your doctor

A key part of our investment philosophy revolves around whether the cash flows generated by the businesses that we invest in are sustainable. While many factors play into our analysis, ESG considerations are a key component in determining the sustainability of cash...

Inverting yield curve dogma

Inverting yield curve dogma

Short rates have gone up in the US. Longer rates less so. The yield curve has flattened; is flattening; and conventional wisdom has it that this will continue. In due course, short rates will yield more than long rates. Think of, for example, two-year bonds at 3% and...