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.

 

Thought of the day – the next funding crisis

The world of scrolling news is a strange one. Headlines stream all day with the really important ones, as designated by a robot somewhere, coming up in RED, but occasionally one of the yellow ones catching your eye and provoking a moment’s thought. Today has been one...

A fiscal deficit to make your eyes water

Last week the Congressional Budget Office (CBO) updated its deficit estimate, in order to incorporate the recent tax reform and spending agreements. The fiscal outlook for the US is simply eye watering. The CBO projects the deficit to increase from 3.5% in 2017 to...

Where’s the fizz?

“So, where’s the fizz?” asked a colleague recently as we discussed conditions in the global high yield bond market. High yield is often considered a risky segment of the financial market, and so my colleague assumed – that after nearly a decade of quantitative easing,...

Poor PreferencESG

Preference shares took centre stage on the financial pages and Aviva press cuttings during March. It looks like we haven’t seen the end of the shenanigans with reports of further FCA digging. So what was all the fuss about? Firstly, a bit of relevant background. These...

Africa ramps it up

The first quarter of this year has seen a significant amount of new issuance from African sovereigns. Moreover, much of this has come at longer maturities, with, for example, Egypt, Kenya, Nigeria and Senegal all issuing 30-year paper in the past few months. Some...

Ball Tampering

Being the token Aussie within Kames multi-national bond team, I need not have feared a lack of commentary from my colleagues on the topic of the Australian Cricket team’s recent ball-tampering scandal. Regrettably, this format does not allow for a full examination of...

What’s going on with US interest rates?

Something has been happening to interest rates in the United States this year and it may be one of the myriad of reasons that markets are a bit unsettled. Interest rate policy from the US Federal Reserve has been well flagged and entirely consistent with what has been...

Why ESG is not new to EMD

At Kames our approach to emerging market debt shares some of the underpinnings of ESG investing. Moreover, this focus has always been integral to investing in emerging markets, long before its strands became as widespread as they are today in developed markets...

Watering down tax structures

On 28 July 2010, the United Nations General Assembly explicitly recognised the human right to water and sanitation. It will also come as no surprise that in the UK we have enjoyed clean water for generations. Investing and supporting companies that deliver clean water...

Italian Election Results

As expected the Italian election produced an inconclusive result. None of the political parties obtained an absolute majority and we are likely to face a long period of uncertainty. In 2013 it took two months to form a government. A positive… The Five Star Movement...

Five things to remember from 1994

The bond market’s memory is arguably short, but 1994 remains vivid as the last time that interest rates were raised in an aggressive, systemic fashion led by the US Federal Reserve.  The effect was dramatic with a near doubling of 2 year Treasury yields to over 7.5%,...

Orange is the new bank

Orange results reported today included the first information on their recently launched digital bank “Orange Bank”. This was launched on 2 November 2017 and had 55,000 customers by the reported year end. So far the impact on Orange is negative due to the launch costs...

How to find the perfect pair

‘Pair trades’ work by going long one bond and short another. In our absolute return bond funds we use pair trades extensively in rates markets to add performance. There’s plenty of fish in the bond market sea; the breadth and depth of global rates markets allows us to...

Southern European banks headed north

One of our highest conviction views this year so far is that subordinated debt issued by southern-European banks is an attractive place to be invested. We are seeing bottom-up improvement, helped by regulatory zeal that still works in favour of bondholders versus...

Video: A view from the US

In this short video, Adrian Hull discusses the outlook for the US market. ‘Certainly a lot of people think there will be a material repatriation of overseas assets for US corporates which will feed in to the US economy…’

The small print view of 2018

Life as a journalist covering fixed income is usually easy in January. They will wheel out last year’s article about the imminent collapse of bond valuations and head off to the pub or the gym. If you are lucky you will get a Bill Gross soundbite for a headline! This...

Winter is Coming!

The Jon Snow (King in the North in Game of Thrones) of fixed income markets has suggested that the end of the bull market is upon us. We only partially concur. We agree that Treasury yields are still too low. Economic fundamentals are as benign as they have been for a...

Not the South Sea Bubble

Christmas allows the opportunity to pull a book off the shelf and read. This year's thriller was "The Great Swindle" a dated (1960) historical account of the South Sea Bubble. It's all in there for today; credit, greed, hubris and collapse. Winners and losers. A...

Make sure to challenge the core…

January is a time for getting back to normality – better eating, early rises and often, going back to the gym. While those gym-goers are challenging their core strength, we are challenging our core macro views as we head into the New Year. 2017 was the most positive...

2018 – a key year for high yield

2018 is shaping up to be a key year for the high yield bond market. In 2017 the market effortlessly shifted from ‘recovery mode’ (following the 2015/16 shale energy crisis) to rallying in conjunction with the global expansion we see around us. As a result, investors...

No alarms and no surprises

In its last monetary policy meeting of the year, the European Central Bank (ECB) kept monetary policy unchanged. There were no surprises regarding policy or signalling from the Governing Council which was very much as expected given it was only in the last meeting...

AT&T and the Justice League

AT&T has hit a roadblock in its merger with Time Warner Inc. in the form of a law suit from the Justice Department to prevent the deal. This may offer an opportunity for investors to benefit. Special Mandatory Redemption Provisions When undertaking a large...

G stands for Governance not Green

The explosion in demand for green bonds in recent years has left them looking expensive versus other fixed income securities, with better options available to investors outside this niche part of the market. Over $100bn of green bonds have been issued so far this...

Should we be preparing for recession?

There is a lot of focus in the press about the flattening of the US curve and what it means for the economic cycle. In Chart 1 below I’ve included the yield differential between 30-year and 5-year US Treasuries over time, and marked recessionary periods in grey. You...

Dull or extraordinary?

Over the years some of us fixed income fund managers have had to endure much leg pulling from our colleagues that manage assets in other more ‘exciting asset classes’. Boring, dull are adjectives I‘ve heard whispered in corridors or by the coffee machine, perhaps they...

Eat, Drink and be Merry

The food retailers will be trying hard to tempt you over the coming festive season with their irresistible products, as UK food remains highly competitive. However the British Retail Consortium (BRC) has warned that Christmas dinner could be an expensive affair this...

Making Stuff is Hard

The most valuable lessons in high yield investing are usually delivered using a mix of shock, pain and humiliation. A rare exception to this occurred to me a few years ago; however I suspect more recently, similar lessons are visiting Tesla investors, albeit more...

The King (well, Queen) is dead, long live the King!

Janet Yellen is set to be replaced by Jerome Powell as Chair of the US Federal Reserve. Whilst markets have speculated what the new kid on the block will deliver, the outcome is evolution, not revolution. Powell was not the preferred candidate of those who thought...

Forward guidance – 2017 style

UK rates move up by 0.25%. This was widely anticipated - but more interestingly - what next? Carney and the MPC would like to be have some flexibility but as the short press statement reminds us – they are as much in the dark about the economy up to, and after, Brexit...

Leonardo da Vinci, Paul Newman, QE and relative value

On Thursday (26th October), Mario Draghi outlined the ongoing monetary easing that the European Central Bank (ECB) will provide to the European economy.  He announced that the ECB will buy assets at a rate of €30bn per month in the first nine months of 2018 (at least)...

More rare than a Chinese Congress

China has been in the news a great deal this week, with the announcement, at the Communist Party’s quinquennial Congress, of the next cadre of leadership alongside President Xi Jinping. However, China did something else significant this week too, and even more...

Winter is coming

UK clothing and sales volume growth has been robust year-to-date. Latest data from Kantar Worldpanel (to 24 Sept 2017) shows the market has improved marginally year-on-year (yoy) for the fourth year in a row. 12-week yoy growth at +1.5% is the strongest seen for...

Familiar faces, unfamiliar risks

A couple of weeks ago, finance ministers, central bank governors, and other interested parties, including lots of emerging markets-focused investors, gathered in Washington, D.C. for the IMF and World Bank Group’s Annual Meetings. Listening to speakers, and talking to...

All over bar the counting

November’s Bank of England MPC meeting is set to send base rates 25 bps higher. Ever since MPC member Andy Haldane’s comments in June, markets have started to price in rate rises. Comments from another member, Vlieghe, further surprised the market and his rate rise...

Love me tender…

Despite recent gilt market weakness related to a shift in rhetoric around the prospect of a rate rise from the Bank of England in the near term, sterling credit markets remain well underpinned. Key to this is the strong macro backdrop and generally robust corporate...

Fortune favoured the brave

At a well-attended investment bank research conference on emerging markets last week, a noteworthy chart on show displayed returns across various asset classes over the year to date. In this chart, six of the top ten asset classes were from EM. Well out in front of...

Paying the price for excitement

A common investment mantra is that high risk equals high returns. Yet, if we look back at history, we see so often this is not the case, for the simple reason that excitement is fundamentally overvalued. We can of course in hindsight look back on bubbles throughout...

No Hope for hay fever

Last week Yuriko Koike, the leader of Japan’s ‘Party of Hope’ and the main opposition to Japanese Prime Minister Shinzo Abe, unveiled her “12 zeroes” manifesto. The promise of ‘zero’ hay fever caught my attention: a welcome claim for the 25 million sufferers in Japan,...

A stock picker’s take on striking gold

Markets are in good shape, and as expected, the new-issue market cranked back into gear last month – an opportunity to find good quality cash flows for our portfolios. What can be astonishing (and pleasing) in this market is the difference in relative valuations...

If The Cap Fits

The Conservative party has long been in favour of a free and open market economy. So it was no surprise to see, at the party conference, Theresa May extolling the virtues of this at some length. Then, after a brief pause to collect ‘her’ P45 from a prankster in the...

Is everything still on track?

The announcement of the agreement to merge Siemens and Alstom’s train assets will create a large European champion, which should be better placed to compete with increased competition from China’s CRRC. It marks the end of speculation on a number of outcomes, and on...

A green opportunity, but at what cost?

Green bonds have grown in prominence over the last couple of years, with a company’s ESG (Environmental, Social and Governance) credentials assuming ever-greater importance for investors. The terminology used to describe green, or ethical, bonds – and the definition...

Cure us of this lunacy!

In a remote north-west corner of Scotland there is an island in the middle of a loch called St Maree. On it are the remains of a chapel and a holy tree, believed to be around 1,300 years old. Legend had it that if you rowed around the island twice, submerged yourself...

Rates market joins the dots

On the face of it, the US Federal Reserve shouldn’t have surprised the markets last night, but by announcing their decision to keep interest rates unchanged and to start their programme to reduce their balance sheet, markets were taken aback – the USD dollar...

Spare a thought for index-linked!

Government bond markets tend not to register as volatile; media headlines typically focus on shares falling by whatever huge amounts. But spare a thought for holders of index-linked! Last week saw the largest weekly fall this year in the long index-linked gilt. The...

Not so (Pet)Smart

Revenues mean nothing if the company in question loses money with every sale made. While this may seem obvious, the high yield market has been reminded of this in a painful way over the last few months. The company in question is PetSmart – a large American pet store...

Why a disorderly queue is worse than an orderly QE

The UK's reputation took a further plunge as investors queued outside the Bank of England yesterday (see below) demanding payment in either gold or other hard currencies in exchange for the pound. The currency took a further lurch lower in value after another frantic...

Prepare to be Prepared

The Bank of England (BoE) today made a not-so-subtle attempt at getting the market ready for an imminent interest rate rise. In the minutes of today’s 7-2 vote it was noted that “a majority of MPC members judge that…. some withdrawal of monetary stimulus is likely to...

Nothing to fear except price itself?

Is the real challenge for fixed income markets solely their valuations? Most measures from the global real economy point to stronger PMI, lower unemployment or increased GDP – all suggesting that rates should be higher. So why are Treasuries at their lowest yields...

Positive on the periphery

The European Central Bank’s (ECB) Governing Council decided yesterday to keep monetary policy unchanged in the euro area but signalled strongly that, all being well, policy would be ‘recalibrated’ at the October meeting. So we will all have to wait until later in the...

Back in the summer of… 2011

As fund managers interacting with our clients, the team often gets asked, “What’s the holding period for a trade”? And, given our strong belief in active management, we typically respond by explaining how we rotate our portfolios’ credit and rates exposure across...

Inflation, remember that?

Both German and Spanish CPI was released today for August. They can be added to the expanding list of countries in the European area where inflation is coming in higher than expected. Germany reported 1.8% year-on-year, with Spain at 2.0%. To put these figures into...

Why would any fool buy a bond with a negative yield?

On the 4th of July this year, the German government issued a bond with a 0% coupon with a maturity date of 7th October 2022.  On its first day of trading this bond closed at a price of €100.78. Sharp-eyed readers will have spotted a potential flaw here. On day one an...

100 days to fall out of love – a French romance

The hundred-day mark is an important checkpoint for every presidency. Mr Macron, France’s youngest leader since Napoleon, moved in the Elysée palace after an inspiring campaign which carried substantial political credit. The first days of his tenure went like a dream...

Where there’s smoke…

The US Food and Drug Administration (FDA) recently announced that it would seek public input to potentially lower nicotine levels in combustible cigarettes to non-addictive levels. The FDA took over tobacco regulation in 2009 and has the authority by law to reduce...

Prime time to checkout Amazon?

Amazon is a company that polarises opinion in the investment world. It has been variously described as the biggest not-for-profit organisation in the world to one that epitomises the new technology world we live in, a company that is at the vanguard of the...

Boring is good

In our experience, some of the best high yield bonds reflect those of us who invest in them; low-key, reliable, and often profoundly boring. The ‘monotony’ of a business that reliably posts juicy but safe cash flows? Sign me up! Some of our fondest positions are in...

The Future will be green, or not at all

Before President Trump began a period of mutual sabre rattling with North Korea, he made arguably his biggest decision so far as President in withdrawing the US from the Paris climate agreement. The withdrawal of the most powerful country in the world failed to derail...

Masterly manipulation

“Masterly manipulation” it was called by J.M.Keynes in secret papers in the 1920’s. Today we call it QE.  A fascinating and only recently discovered entry in old Bank of England ledgers revealed that in 1914 the Bank was forced to purchase Gilts for itself as there...

Testing times

The recent egg scandal has once more brought the issue of food safety into the public spotlight. Along with the horse meat scandal and baby milk in China, there are strong reasons to suggest that food testing will continue to be required to ensure the quality of the...

Greece-ing the wheels of recovery

Greece returned to the international bond markets last week with its first issuance since 2014, which at the time was its only issuance since the European Sovereign Crisis when the vast bulk of its debt was ‘restructured’. This return to the market is another small...

A Liborious task ahead

Yesterday the CEO of the FCA, Andrew Bailey, gave a speech in which he supported ending the publication of LIBOR (London Inter-Bank Offer Rate), the key risk-free reference rate used by the financial system in the UK. In general the comments were nothing new – this...

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...

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....

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,...

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...

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...

Qatar and the GCC: not much cooperation here

Experience would tell you that, in the current dispute between Qatar and its neighbours, cooler heads on both sides would prevail soon enough, and the situation in the region revert to normal. However, reviewing the list of demands made overnight by Saudi Arabia and...

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...

Complain about the winds changing, or adjust the sails?

Following the financial crisis our main central banks (to keep it simple let’s stick with ECB, BoE and the Fed) needed to get real interest rates (the difference between the nominal interest rate minus inflation) down.  This is the normal playbook that a Central Bank...

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...

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...

Facing a squeeze – new issue premiums

Corporate bond issuance has been strong over the last two months despite a brief slowdown prior to the French presidential elections. Syndicate desks at investment banks continue to aggressively tighten guidance from the Initial Price Talk (IPT). The level of new...

Europe not Spain executes Popular wind-up

Banco Popular’s equity and subordinated bondholders have been wiped out today. To come to this end, the EU’s Single Resolution Board (SRB) has exercised its power to resolve the Spanish bank after the ECB stating last night that the lender is ‘failing or likely to...

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...

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....

Bank of Canada – no change but much to talk about

At its latest policy meeting, the Bank of Canada opted to leave rates unchanged at 0.50%, as was widely anticipated. The accompanying statement was marginally less dovish than expectations at best. All in all, nothing really earth shattering. For me, it’s the...

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...

“How’s that reflation stuff working out for ya?”

In the pantheon of American leaders, Sarah Palin does not obviously spring to mind.  Nonetheless she did have a good barb at then President Obama in the early stages of his administration when the economy wasn’t going so well when she asked a tea party convention in...