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.

 

The team’s latest thoughts:

Year of the Pig

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Still feeling lucky…?

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A tale of two debt mountains

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Safe as houses?

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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…?

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

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?

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

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...

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

“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?

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?

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

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

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

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

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

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

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

“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

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

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

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

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

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

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

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...

Beautiful inside my portfolio forever

It has been 10 years since Damien Hirst sold 233 lots at Sotheby’s raising $198m - entitled “Beautiful inside My Head Forever”. The sale was conducted on September 15th & 16th and the timing proved an odd counterpoise to the destruction and collapse in financial...

ECB Meeting – Steady As She Goes

The ECB left rates and the asset purchase target unchanged at their September monetary policy meeting. The meeting was accompanied by the ECB staff macroeconomic projections, which showed a marginal reduction in the growth forecast versus the projections released in...

Who says Americans don’t do irony?

Apple recently announced their latest range of new products. There were no surprises in the line-up given the usual speculation and leaks in the run up to the event. The iPhone range is now topped by the new XS Max with a base price in the US of $1,099 for a larger...

Is the Bank of Japan in a tangle?

Monetary policy in Japan has got into a bit of tangle.  Back in 2016 the Bank of Japan announced that in addition to managing asset purchases and interest rates on deposits, it would also target yields on long term Japanese government debt. The target was a yield of...

BoE – a dovish or hawkish rate hike?

The Bank of England (BoE) have today raised interest rates to 0.75%, the highest level in almost 10 years. It would have been a total shock however, if they did not raise the interest rate given the market had it priced in for a number of weeks without any Monetary...

Red Flag Indicators

At Kames we study and analyse financial accounts as part of our wide due diligence work when deciding whether to lend our client money to a particular corporate entity or not. While this process is quantitative in nature, our process also encapsulates a more...

World Cup Picks ‘n’ Pans

Excitement is brewing as the World Cup begins today in Russia. Here are the Kames Fixed Income team’s top 5 picks for the tournament. World cup ranking (1) The ultimate tournament team – serial winners and current holders of the cup, they have a knack for peaking at...

Kames Wags ESG Axe

For those wanting to find out what fund management is all about, don’t watch “Billions”. However, ever of the moment, Season 3 Episode 9 sees Taylor Mason pitch to a Russian oligarch, Axe Capital’s first foray into an ESG strategy. 29 years behind Kames, Taylor… The...

Read the prospectus, stupid.

A common question I am asked when meeting with investment consultants and prospective clients is: “what is it that you do differently to other investors?” Given the price action of some high yield bonds, it could be argued that reading the documentation is a key...

Navigating a sea of M&A

Much has been written about the recent acceleration in global M&A (Mergers & Acquisitions) activity. The $1.4trn worth of deals announced globally year to date is 75% higher than 2017 and the strongest first four months of any year on record according to...

Inflation is bad for bonds – but not in my world

Fixed income. Why bother. It’s a dull asset class that simply involves collecting the fixed coupons and managing relatively stable capital prices. And in an environment of better global growth and the increasing threat of inflation, what’s to like? The value erosion...

3 isn’t a magic number…

Having done some research on the properties and history of the number three, nothing has pointed towards its hypnotic features. I will duly update Wikipedia to immortalise this point. I am very puzzled by the level of attention that the US 10-year yield at 3% is...

Netflix has no time to chill

On this week exactly a year ago, our co-Head of Fixed Income Adrian Hull wrote about Netflix’s debut issuance (Netflix launches Billions) into the euro bond market, when it printed €1bn of 10-year maturity bonds. One year on and Netflix has just priced its first...

LIBOR, it’s all coming to a dramatic end!

You need an interesting title when writing about a topic that tends to have people nodding off after the first sentence. So what is the deal with this LIBOR thingy then? LIBOR – the London Inter-bank Offered Rate – is going down the drain, thanks to the traders who...

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...

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)...

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...

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...

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...