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:

Fixed income outlook 2nd half 2019 (video)

...
More

DS Smith: Game, Thermoset and Match

...
More

When liquidity dries-up

...
More

Save the whale

...
More

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?

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

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

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!

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

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!

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

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

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

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)

“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?

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

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

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

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?

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

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?

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?

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

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

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

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?

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

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?

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

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

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…’