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:

ReWard your investment not your doctor

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Inverting yield curve dogma

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Beautiful inside my portfolio forever

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Why I’d rather own a McLaren than a Ferrari in a hard Brexit

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Disappointing data and its dovish implications

Rates specialist Juan Valenzuela considers the latest US data release and how this could mean a more dovish Fed at its September meeting. US data released on Friday undoubtedly disappointed. June CPI was weaker than expected – a negligible undershoot in itself, but...

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...

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...

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...

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...

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...

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...

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...

Will there be a rate increase in the Eurozone?

On Tuesday this week the European Central Bank released their quarterly Bank Lending Survey for the Eurozone. This is a comprehensive document available in the ECB’s website that covers the lending behavior of 140 banks across the Eurozone. Click here to view.  The...

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...

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...

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...

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,...

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...

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,...

The end of sterling corporate QE

The Bank of England is within sight of the end of its corporate bond purchase scheme, a year ahead of schedule, having bought in excess of £9.1bln worth of bonds since the end of September last year.  Given the relatively robust performance of the economy since...

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...

Pointing to healthy levels of economic growth

The March survey PMIs (Purchasing Managers' Index) continue to point towards healthy levels of economic growth. Encouragingly, the pick-up in activity is very broad-based across developed and emerging market economies. In GDP terms the current level is associated with...

UK high yield retail – are you being served?

UK retailers are facing significant pressures over the coming years – from the rise in business rates, higher supplier costs due to weaker sterling, and the new national living wage; to the expected continued growth of online retailers like Amazon and Asos. Given all...

French politics – where the mud sticks

In France, the National Front is stronger than ever. The rejection of the elites, the international military tensions (Chinese sea, NATO troops in Romania and in Poland) and the effect of globalisation could lead Marine Le Pen to an important score in the looming...

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...

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...

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...

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...

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...

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...

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...

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...