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.

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...

read more

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...

read more

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...

read more

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...

read more

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...

read more

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...

read more

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...

read more

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...

read more

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...

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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...

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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...

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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...

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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...

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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...

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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...

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Who Benefits from QE?

A report out overnight from the Bundesbank examines the impact of quantitative easing on the rate of interest German authorities pay to borrow money. In 2007 the average rate for the government or a local authority to borrow was 4%, last year it was less than 2%. Over...

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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...

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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....

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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,...

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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...

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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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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...

read more

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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...
Read More

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...
Read More

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...
Read More

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...
Read More

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...
Read More

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...
Read More

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...
Read More

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...
Read More

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...
Read More

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...
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