BondTalk

Direct from the desk of Kames Capital's award-winning fixed income team

BondTalk is 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. Sign up for our weekly BondTalk email using the registration form.

Not just all talk, maybe some trousers?

Well now, a month ago I wrote a piece comparing the current mania for buying government debt to “The Emperor’s New Clothes”. Let’s all lend to the government for returns massively below the level of inflation and growth and pretend it’s all good. Individually we all...

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UK employment is not the full story

The dilemma for the Bank of England (BoE) intensifies in light of this morning’s May employment figures. UK unemployment has fallen further to 4.5%, versus the BoE forecast at 4.7%. To find a similarly low level you have to go back to the mid-70s, as shown in Chart 1....

read more

Kames Keeps up with the Kardashians

Reality television production might not immediately appear to be the strongest credit proposition – but appearances can be deceptive. A new bond issue from Banijay Group (responsible for many well-known hits including ‘Keeping up with the Kardashians’ and ‘Location,...

read more

Holmes moans about loans

As a high yield fund manager it has been interesting to watch leveraged loans become something of an investor darling this year – almost $13bn has flowed into US loans over the year to date. Investors have sought out loans as a place to hide from a Fed that is raising...

read more

Awake at the wheel

“Asleep at the wheel” has been the accusation levelled at central bankers such as the Bank of England (BoE) over the financial crisis of 2008. But eager to prove its new found vigilance, the BoE yesterday tightened its controls on bank credit by announcing changes to...

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Valuations Sour the Green Apple

This week saw the issuance of Apple’s second green bond, a $1billion 10-year transaction to help fund its goal of running 100% of the company’s operations on renewable energy. The issue builds on $1.5billion of green bonds sold by Apple a year ago, the biggest ever...

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More HC Andersen: The Emperor’s New Clothes

2017 is the 180th anniversary of the publication of Hans Christian Andersen’s short story “The Emperor’s New Clothes”. For those not familiar with the tale, it is the story of how two conmen convinced an Emperor to part with money for nothing – by creating a scheme...

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UK election positives

It is early days yet but it looks like Theresa May is going to be returned as prime minister as the Conservatives form a government with support from the Democratic Unionist Party (DUP). On first glance it seems a bit of a mess but taking a closer look at the results...

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Careful what you wish for!

Careful what you wish for! Steve Jones our CIO uses this phrase; Theresa May should have heeded these words. Not a natural gambler, May’s snap election has backfired leaving political uncertainty. There is little doubt her political authority is reduced and there will...

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Politics getting in the way – again

One of the biggest surprises so far this year has been the strength in the Italian economy. In Q1 2017 Italy posted a 0.4% increase in real GDP, the strongest quarter since the European Sovereign Crisis. Meanwhile composite PMIs are reaching new highs, unemployment is...

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Somewhat dovish

The “solids, modestly and little changed” have it. Yesterday’s FOMC minutes as ever run to a dozen pages and steer the market into its thinking. The small bounce of around 25c in 10-year US Treasury prices show the text was received in a “somewhat” dovish tone....

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Low unemployment… and low gilt yields

The most recent unemployment rate in the UK came in at 4.6% – along with the highest ever employment rate achieved, at 74.6%. Economic theory – namely the Phillips curve model – tells us that as the level of unemployment falls, the economy can expect a corresponding...

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Taxi Driver – the sequel

Sequels are rarely good as the first. In Robert De Niro’s original 1976 film, Taxi Driver, Vietnam veteran Travis descends into New York’s low life as sexual infatuation and delusion overtake him. As the original is based on sex it’s no surprise that the sequel is...

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And another thing Mr Carney…

A quiet weekend for me – my usual taxi-driving services not required. My 17-year-old son took himself off round a series of Universities, ostensibly checking them out ahead of deciding where to study next year. I note the perfect correlation between institutions on...

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EM Corporates – Stay selective

It’s a difficult time to like EM corporate bonds. In the first instance, valuations are expensive. In fact, emerging market corporate bonds now trade at a tighter spread than emerging market government bonds. Source: JP Morgan. CEMBI is the EM corporate index, EMBIG...

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Sell gilts: UK high street inflation shocker!

I have just wandered to my nearest Starbucks for the bargain that was its “tall, black, filter coffee”. As others have paid £4 for their daily dose of vanilla-spiced, grande, half-fat frozen frappuccino, that august American tax-paying institution has been charging me...

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UK election; early thoughts

It seems a done deal that the Conservative Party will win the 2017 General Election and will increase its majority in the House of Commons. The Conservatives are around 17 points ahead in the opinion polls and the Labour Party’s election campaign to date can best be...

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History Repeating – divergent economic data

History has a habit of repeating itself.  We often hear “it’s different this time” only to find that events at least rhyme if not repeat the past.  A good example is US GDP data: Q1 GDP data has been weaker than expected in the US in each of the last few years and it...

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Challenging consumption in the US

We should not totally dismiss the weakness in Q1 GDP in the US. Private consumption disappointed – no question about it – while inventories detracted 1% over the quarter. But there were also reasons to celebrate. We saw a healthy increase in investments – and since an...

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Netflix launches Billions

OK, so “Billions” is actually produced by Netflix competitor Showtime, owned by CBS and broadcast in the UK by Sky Atlantic. However, yesterday, Netflix issued its debut bond into the Euro market with €1bn of 3.625% 10 year bonds using its B1 rating.  What is unusual...

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Step out of the shadow

We believe there is a long shadow of the 2008 Global Financial Crisis (GFC) that still prejudices investor sentiment to risk and return within corporate bond markets. Recently we were asked about default rates in investment grade credit, and what impact this had on...

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The Sleepy High Yield New Issue Market

The chart shows the proportion of new debt raised in the high yield market that is used to refinance existing borrowings, rather than for more speculative purposes such as capital projects, mergers & acquisitions, and returns to shareholders. Refinancing is the...

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Starting the Final Lap

The final lap of the race for the French presidency has started. Emmanuel Macron with 23.75% of the votes and Marine Le Pen reaching 21.53% will compete for the second round of the French presidency on May 7. Voter turnout was 78.69% versus 80.42% in 2012. French...

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UK election – Bypassing the bond market, again

Election announcements make good theatre. A rushed press conference, lectern in the middle of Downing Street, searing Prime Ministerial looks and boom – a snap election for June 8. In years gone by, such uncertainty was a source of material volatility to all markets,...

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US inflation – letting off a little steam

The inflation surge as evidenced by the TIPS market (US Government Treasury Inflation Protected Securities) that started around September ’16 has taken a bit of pause and has actually has started to reverse. Undoubtedly there were some Trump effects to the inflation...

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The coupon’s round trip

A few days ago we wrote about the possibility of the US Federal Reserve not reinvesting maturing bonds in its QE programme. Over time this would see the Fed’s portfolio of bonds reduce to zero (a very long time). This debate is about the reinvestment of maturities,...

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To reinvest or not to reinvest

Last night the US Federal Reserve debated its $4.5 trillion balance sheet. This discussion has started to gain momentum with the change of politics on Capitol Hill at the end of 2016, and with one of the Fed governors William Dudley already indicating that 2018 may...

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South Africa: stay cautious for now

On Friday morning President Zuma of South Africa dismissed his Finance Minister and Deputy Finance Minister. Such a move had seemed likely after the highly unusual decision to call back the two ministers from a roadshow in London earlier that week. Finance Minister...

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China in the age of Trump

China has seen elevated credit growth since the global financial crisis, such that investors consistently raise this issue as a core concern for emerging markets. The more recent rise of President Trump has also added to the pressure on the world’s second largest...

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Heed the lessons of the past

"Markets are highly correlated with historically low volatility. Central bank activity has created a “goldilocks scenario” where investors treat bad news as good and good news as excellent. As a result of low cost of debt, markets have been propelled to record highs....

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Kondratieff

On Tuesday we hosted a conference where we heard from our own team and a couple of economists. Chris Watling at Longview Economics takes a, well, long view. He is quite a proponent of Kondratieff. Who he? Starting at the end, he faced Stalin’s firing squad in 1938 at...

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A dovish rate rise

As anticipated by every single economic forecaster, the Federal Reserve raised rates last night.  Their range for interest rates was increased by 25 basis points to 0.75% to 1%.  The 2017 and 2018 median dots were unchanged with two more rate rises anticipated by the...

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Going dotty tonight

At 6pm GMT it is widely anticipated that the Federal Reserve will raise interest rates by 25 basis points.  It would be a huge market surprise if they did not increase rates and an absolute shock if they moved by 50bps.  What matters more is the language around the...

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German yield curve on a rollercoaster ride

The shape of the German yield curve has seen a rollercoaster ride in the last 12 months.  The ECB’s QE programme caused the curve to flatten as the national Central Banks bought their allotted amount of bonds across the curve, with the ECB’s rules excluding the buying...

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Can your gilt tracker do this?

The Bank of England re-started its gilt buying operation in August 2016.  This action was taken to provide insurance against an anticipated slowdown in the wake of the EU referendum vote.  As part of the QE programme the Bank also re-invests the proceeds of the...

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PM’s Questions – 2 March 2017

When will the 10-year US Treasury yield be a ‘buy’? Not yet – explains Phil Milburn in this week’s PM Questions. Because while some things have changed, some definitely haven’t… Phil also shares his view on how many US rate rises we’ll face this year, and where rates...

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Why the WIRP screen is misleading for US hikes

There has been some chat in the press over the past days suggesting a 50% chance of a hike in March. We think this is a little misleading. A well-used analytical tool on Bloomberg shows a 50% probability, but this number uses the midpoint between the upper and lower...

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Mixing your metaphors

Monday morning sees our Fixed Income team sit down and thrash what’s what for markets. We assess how our positioning has fared and should it change. In the debate this morning one of the managers quipped “If you are going to invest in a country with a crazy dictator,...

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No fund manager should ever be bored at work

In a survey cited in the FTFM section of today’s FT it was stated that 68% of fund managers are bored at work. I would argue that it is practically impossible to be bored as a fund manager. In a rapidly changing world, keeping on top of all the developments occupies a...

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What’s wrong with the bond market?

The last few months have seen some dramatic changes. Lots of attention has been paid to the Trump team line up; much political capital spent on Britain's Brexit Bill being pushed through the UK Parliament. Given these events along with upcoming European elections, you...

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A million miles apart

The scores were in today for Europe’s 2016 GDP. A mildly disappointing 0.4% growth in last quarter took the full year’s growth in 2016 to 1.7%. Not bad but short of the achievements in the US and UK where growth measured more than 2% for 2016. Digging deeper and an...

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Overreaction, or complacency?

Italian government bonds are peripheral European investments and trade as such – they have embedded risk and are correlated to credit risk over the long term. But this relationship has broken down over the last few months. The following graph tracks the Italian spread...

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Removing the cover of low inflation

Eurozone CPI has picked up quite dramatically in recent months from 0.5% in October 2016 and just 3 months later to a very respectable 1.8%. Ok, most of this is base effects of energy and food inflation coming through, but the average CPI rate in the Eurozone has only...

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Duration risk – a valid concern, but not one of mine

Mark Benbow warns of the growing duration risk in the bond market and how clients should be mindful of facing more risk by default, rather than design One of the biggest concerns that bond investors face right now is duration risk – the risk that a rise in interest...
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PM’s Questions – What market dislocations we do and don’t care about

Phil explores what market dislocations we do and don't care about - and how being a geek can help you to make money for...
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Disappointing data and its dovish implications

Rates specialist Juan Valenzuela considers the latest US data release and how this could mean a more dovish Fed at its September meeting. US data released on Friday undoubtedly disappointed. June CPI was weaker than expected – a negligible undershoot in itself, but...
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The Bank of England liquidity report and what the authorities could do to help

Phil gives the detail – not the drama – from yesterday’s Bank of England liquidity report, and explores what the authorities could do to help. Click here for part...
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Not just all talk, maybe some trousers?

Well now, a month ago I wrote a piece comparing the current mania for buying government debt to “The Emperor’s New Clothes”. Let’s all lend to the government for returns massively below the level of inflation and growth and pretend it’s all good. Individually we all...
Read More

UK employment is not the full story

The dilemma for the Bank of England (BoE) intensifies in light of this morning’s May employment figures. UK unemployment has fallen further to 4.5%, versus the BoE forecast at 4.7%. To find a similarly low level you have to go back to the mid-70s, as shown in Chart 1....
Read More

Why have four banks needed capital in the last month? And can we expect another financial crisis?

Investment specialist Adrian Hull steps in for ‘PM’ this week to reflect on the anniversary of Northern Rock’s collapse – why have four banks needed capital in the last month? And can we expect another financial...
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Kames Keeps up with the Kardashians

Reality television production might not immediately appear to be the strongest credit proposition – but appearances can be deceptive. A new bond issue from Banijay Group (responsible for many well-known hits including ‘Keeping up with the Kardashians’ and ‘Location,...
Read More

Holmes moans about loans

As a high yield fund manager it has been interesting to watch leveraged loans become something of an investor darling this year – almost $13bn has flowed into US loans over the year to date. Investors have sought out loans as a place to hide from a Fed that is raising...
Read More

PM’s Questions – What’s going on in bond markets?

What’s going on in bond markets? Phil reflects on a volatile...
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