Uncle Jim’s World of Bonds: Recent Episodes
Jim
There is nothing more fascinating than a fixed income instrument. Nothing. Listen to Jim transport you to a world of convexity, basis points, covenants and debt-to-gdp.
For professional investors only. No advice here. No mention of funds or products. Personal thoughts, not that of any employer.
The ‘boiling frog’ impact of higher rates on credit is starting to be felt, but no big default rise until 2025.
Could mean less demand for traditional EZ sovereign debt, especially as France risks a downgrade from S&P.
Also: credit spreads are tight and stable. It was quiet - too quiet…. And CMBS takes its first big hit since the GFC.
And it’s not just because of July’s General Election - service sector inflation is too strong. 💪
And I take a look at Monetary Policy Rules like the Taylor Rule (Spoiler Alert: the Fed should cut now).
Also: CPI index rebalancing, corporate default rates, and the extreme injustice of the Nottingham Forest points deduction.
The BoJ is expected to hike for the first time since 2007 later this week. And the Fed might signal a higher r* via the ‘dot plot’ at this week’s FOMC.
The latest US jobs numbers reinforced the market’s view that the economy is resilient, but not re-accelerating.
What does the Budget mean for gilts? And how does ‘tipflation’ get measured in the CPI?
And a load of economic ephemera to keep you entertained. Includes a disconnect in the textbooks as to the causes of the Great Depression.
And the Nikkei approaches its 1989 all time time, having fallen by 81% in the meantime.
What’s the best New York song by the way? The LCD Soundsystem one? Velvet Underground’s Waiting For My Man? Fairytale of NY? Empire State of Mind? Don’t say Frank Sinatra.
Man I go on a bit. The stuff about The Pogues is at 38 minutes if you can’t face the rest.
Gilts underperformed significantly last week on higher borrowing expectations. Don’t worry though - it wasn’t as bad as the Trussonomics sell-off.
We also have Moody’s looking at Italy’s credit rating this week, with the risk of a downgrade to junk.
What would you do with your portfolio if you knew Trump was going to be next US President?
Banking analyst Dave Covey talks CS AT1s, BoA’s US Treasury bond holdings, CRE lending and so much more.
And a belated look at Arslanalp & Eichengreen’s paper on government debt levels. TL;DR - tough to get them down from here given the growth outlook.
And Judy Stephenson’s letter to the FT about making sure you use the right inflation numbers when looking at historical building costs.
Lots of central bank activity this week, albeit with a lurking threat from higher oil and rents.
The UK banking system is in a solid place. But look out for risks in pension funds, insurers and hedge funds around US Treasury bond exposures.
The ruble weakens - but what actually happened this weekend? No answers here I’m afraid.
Will UK inflation finally head below 10%? Also today we look at US M2 money supply and the expected T-Bill tsunami.
The Swiss regulator sends bank capital markets tumbling, but calm is restored later by EU and UK regulators.
Reuters has reported that at an ECB Council away day ‘more then two dozen’ slides showed that inflation is currently driven by profiteering, not wage growth.
In which I drag out the old Hemingway quote again, and delve into a new JPM paper on the subject.
Hikes from the Fed, ECB and BoE. Bond markets see record rallies. Risk loves it too. The end (of high interest rates) is nigh?
An interview with the former Fed Vice Chair about his fascinating new book. Keynes, Kennedy, Friedman, Reagan, Bernanke, and Clinton v the Bond Vigilantes. It’s all here. The book is out now.
Put down your John Grisham, pour yourself a pina colada and take a listen to this by the paddling pool.
But because a US recession is ‘declared’ rather than measured, a soft-ish landing might break the bond market’s most beloved model. Also - the Laffer Curve doesn’t work.
Utilities analyst Orlando Finzi gives an update on the massive rise in gas prices, and the implications for inflation and growth.
Also Lagarde and the ECB - rate hikes in July and September. Positive Rates Coming Back.
We end Q1 with inflation at career highs for many (most?) bond managers. Also goodbye to a couple of my bond salespeople - including one whose surname I get, Freudianly, wrong. 🤦
There’s not much left in the world of negative bond yields after Powell’s comments last week…
Sunak isn’t going to like today’s headlines. All about the cost of living crisis and collapsing real incomes.
A kick in the teeth for Treasuries as Powell talks of even more rate hikes from the Fed.
The ECB, the Bank of England, and then the US jobs data - one shock after another. Bonds sold off bigly.
Market is now expecting 2 rate hikes from the ECB this year! HUGE moves in bonds and currencies.
US inflation hit 7% last month, the highest since 1982. Bond markets have sold off again, and credit is having its worse ever start to a year.
The Moderna CEO was pretty negative on the Omicron outlook today. Also, BRICS revisited.
Great news from the U.K. labour market. But it puts a Bank of England Rate hike back in play.
6.2% rise in consumer prices surprised economists. And pretty much every component of inflation is running hot.
A Chinese property developer is downgraded to Junk, and the whole HY market falls, again. The HY index is down 30% since the summer.
Will the Bank of England hike this week? And if so why did gilts rally so much last week?
Are central banks about to make a terrible mistake by hiking rates too soon, or does the inflation outlook justify higher interest rates?
A look a Federal Reserve blog on that crisis. Also, the US yield curve starts to flatten…recession ahead?
Corporate bonds have outperformed government bonds in 2021. How much further can that go?
The US has managed to delay running out of $ from October to December. But the chances of Biden’s big stimulus bills getting passed unscathed look bleak now.
Government bond yields rise. And still no sign of the Evergrande coupon payment on the $ bonds…
More on the expected Chinese property default. Also, today sees the U.K. launch a green gilt.
Chinese property company Evergrande is in trouble. It’s bonds have fallen to 25 cents in the dollar. Is this the “big one” for Chinese real estate?
Have a read of the Mian, Straub & Sufi paper (or the FT’s Robert Armstrong’s summary of it).
The Delta slowdown, the end of the US global policeman role, and China’s pushback on capitalism.
Duncan’s new book is a “must read” look at how the British economy became the world’s leader - and what went wrong thereafter…
An interview with the famous Barclays government bond strategist, Moyeen Islam. The BoE has announced its QE exit policy - have they got it right?
Inventory drawdown results in a growth miss for the States. Also today, the Fed starts thinking about tapering.
The Chinese and HK stock markets are tumbling on regulatory fears. Add that to the existing Delta Variant worries and US TIPS real yields are at record lows of -1.1%.
5.4%! And core inflation up 0.9% over June alone. Can we still use the “transitory” narrative?
The U.K. government is going to issue “green” bonds in September. What will they look like? How much will they cost?
An interview with Greg Smith, expert in African bond markets and economics, about his great new book.
Also, the Bank of England is less hawkish than feared. And High Yield isn’t very high yield.
Talking about yesterday’s change to the Fed Dot Plots, plus a FTSE Russell sovereign default model based on climate change.
The Cato Institute’s Ryan Bourne discusses his new book on the economics of the pandemic: the Value of a Statistical Life (VSL), public v private actions, global trade and vaccine nationalism, and the all-important labour market.
As Europe ages in the same way as Japan has, should we expect higher or lower inflation? Also today, I try to pronounce Tokamak.
Is the Eurozone reopening going better than expected? And why are European government bond yields rising?
Foreigners bought $200 billion of USTs in Q1. Also, U.K. inflation, and weak Eurozone bond markets.
Only 266k jobs created in the US in April, nowhere near the 1 million expected. In today’s podcast we ask why. Also, Scottish independence, and the Bomber Mafia.
A longer episode covering the market’s Fed hike expectations, and credit market performance.
Can we afford it once rates rise? Also we welcome Turkey’s 4th central bank Governor since 2019.
A bond market history lesson. Chairman G. William Miller takes over at the Federal Reserve.
Government bond yields are assumed to have a close relationship with nominal GDP growth. How’s that going?
How sensitive is the UK’s government debt to rising rates? Also the Fed’s Brainard speaks about last week’s bond market turbulence.
Australian government bond yields up 17 bps overnight. But risk assets are not moving...yet. Also: Sir Kier Starmer, the £, and Uber.
Yields are up everywhere. This hasn’t hit risky assets yet - but it might just be a matter of time. Also: the thorny case of Finders vs Keepers.
The U.K. ended 2020 at the bottom of the developed market league tables for growth. But are we comparing like for like?
Gilts sold off biggly yesterday as we got hawkish commentary out of the Bank of England. Negative rates off the table?
He’s back - probably. Italian BTP yields fell 10 bps yesterday as a result. Also back? The KLF. And inflation?
10 years ago Bill Gross said the U.K. was in severe danger on account of its budget deficits. It didn’t work out like that. Also today I look at my favourite gilt, UKT 8% 2021.
This week we find out more about the Fed’s monetary policy outlook given recent softer jobs data, and the likely timing and size of Biden’s stimulus package. Which will bond markets care about most?
5 reasons why inflation comes back in 2021 from Morgan Stanley. Plus a musical tribute to the new Treasury Secretary.
When Smaug captured the dwarves treasure, he plunged the economy of Middle Earth into depression and deflation. Perhaps leading the rise of the far right (Sauron).
Stimulus, fallen angels, sovereign defaults, and a CDS disaster that will go down in bond market history.
Yields are rising, curves are steepening. A big Biden stimulus is expected. Will we get higher Fed rates and inflation though?
Today I look at EMD’s default experience so far this year, and then at the forward projections for default risk. Also I preview Thursday’s ECB meeting. And Weird Left Finance Twitter gets a shout out.
Valery Giscard d’Estaing, the former French President, died this week. He was a key player in France’s economic relationship with the US. He also invented the Giscard Bond - linked to gold.
But a good day for the US economy as the Democrats and Republicans showed that they might be able to work together around fiscal stimulus. USTs sold off heavily. Also today I discuss a new Fed paper on corporate debt overhang.
Lots of new appointments in the world of US economics to talk about today. Also, RPI reform in the U.K., and pressure on the New Zealand central bank.
With Zambia having defaulted on international bonds last week, it’s a good time to interview Greg Smith, emerging market debt analyst, and former World Bank African economist. How was the Covid shock for the region, will we see more defaults, and what’s China’s new role in African debt dynamics?
I’m guessing we all agree that the recent vaccine news makes a strong economic recovery likely in 2021. But how much long lasting damage - or scarring - has already occurred?
In today’s podcast we have a new series from the “Girls” star, we have Fed speak, bitcoins, WFH and a HUGE bond auction.
Ok the podcast is mainly about central bank rate expectations, but I also suggest that puppy inflation is not being captured in the U.K. RPI stats.
Corporate America got the result it wanted - no prospect of regulatory pressure given the Dems didn’t win the Senate. Risk assets rally, but the US dollar is weakening. More Fed cuts to come?
A quick morning update on last night’s US elections. US Treasuries rallying hard as fiscal expansion expectations are scaled back.
Today I look at sovereign CDS markets given the UK’s downgrade last week, and ask whether the IMF really has changed its tune over austerity.
Today I look at the newly minted Nobel Economics prize winners, and their work on auction theory. Also Moody’s and the U.K. credit rating, and EMD fund flows.
Today I look at a weak US CPI print, and an Economist article called “Eternal Zero” about low bond yields.
Today I look at some new IMF research, as well as at a Chinese policy change, and an interview with the ECB’s Lane.
Chances of negative rates have increased in the U.K. after a disappointing growth number for August. It should have been strong given Eat Out To Help Out.
Corporate bonds have rallied massively from the distressed levels we saw in Q2 this year. What are current spread levels telling us about expected defaults?
Inflation numbers are coming in for September and they are terribly weak in Europe. The ECB is worried. Might they, like the Fed, change their inflation target?
Who’s really best for the economy, Republicans or Democrats? Paul Krugman has the answer. Also a remarkable academic paper is damning on Central Banks’s QE analysis!
Today I look at the year to date total returns of bonds and stocks, as well as at the dispersion of price changes within the official inflation numbers. Bike prices are up 6%, men’s’ suits down 17%.
Polls are suggesting that a Democrat “clean sweep” is possible in the US elections next month. If that happens, fiscal spending will rise significantly. In the podcast I look at Biden’s plans, including his future response to China.
Yesterday the BoE told the market to prepare its systems for negative interest rates. There’s likely more QE on the way too. In today’s episode I also look at the latest from the Fed, and China’s possible entry into the WGBI.
Japan is getting a new Prime Minister later this week. Yoshihide Suga will replace Shinzo Abe. What does that mean for Japan’s low growth, high government debt economy. And is Japanification really a terrible outcome for the west?
Anthropologist David Graeber sadly died last week. One of his most important works is “Debt”, which challenges our idea of money, and calls for widespread debt forgiveness in society. In today’s podcast I look at that book, and also at the reasons behind the fall in the UK’s pound.
Central Bank inflation targets don’t change very often, so it’s a massive deal when the world’s most important CB changes its goals. The Fed will no longer let disinflationary “bygones be bygones”. That means no rate hikes for a very very long time.
This is the first episode of Season 2 of the World of Bonds. In it I examine the yield curve steepening we’ve seen, the relentless grind lower in credit spreads, and the stabilisation of the US dollar.
This is the last episode of Series 1 of Uncle Jim's World of Bonds, although I'll be back over the summer if something interesting happens. In this longer episode, I look at what bond markets have learnt since lockdown began in March 2020. And what are the 5 things that I'm going to be reading up about over August?
A gold market special - how does today’s new record high for the “barbarous relic” relate to the world of bonds?
We’ve got the first study on whether negative rates work from a behavioural point of view. Also today, the new Euro Area Recovery Plan, and a look at credit downgrades.
You know we like a bit of economic history here, so here’s some evidence from hundreds of years of pandemics, from the Black Death to the flu of 1957.
We looked at the 6 “myths” around deficits in my last podcast, and the idea that there is no constraint for sovereigns to borrow unlimited amounts in a world of economic slack. Today we look at some of the reviews and criticisms of the book.
A special episode focusing on the economic book of the moment, The Deficit Myth. What are the limits to government borrowing? Are there any? In today’s podcast we look at the 6 myths highlighted in Stephanie Kelton’s book. The strongest message? Don’t think of a government like a household.
Today we look at the UK’s new fiscal stimulus measures, and also about the US “ban” on ESG.
We also look at COVID adjusted inflation rates, and the strongest U.K. money supply growth since Henry VIII.
The jobs rebound in the US has been strong so far. What happens though when furlough schemes start to come to an end later this year?
A super strong Q2 for all asset classes. In today’s podcast I look at this year’s financial markets performance so far, as well as asking whether Boris Johnson has anything in common with FDR.
The Federal Reserve has started to talk about YCC as a possible next monetary policy step for the US. Japan got there first - it’s not actually had to buy many bonds to “pin” yields at zero. Is that a bug or a feature?
Paul Tucker, former BoE Deputy Governor is in the press today worrying that central bank independence is under threat. In today’s podcast we look at his fears, and also analyse the outperformance of ESG investment strategies in the time of COVID. Can we believe the numbers?
Eric Lonergan & Mark Blyth explain how anger put Trump into White House, led to Brexit and the Yellow Vests in France. And then discuss how negative interest rates allow societies to handle the root causes of all this anger and fear.
After Trump’s disastrous Tulsa rally this weekend, it’s time to look at the latest betting odds for November’s election, and also to look at some of the policies that might get enacted in either a Democrat or Republican White House.
U.K. debt to GDP just passed the 100% level, and with yesterday’s slightly disappointing Bank Of England policy announcement, there’s going to be a lot of new gilts for the bond market to absorb.
Huge rally in credit today on the back of the Fed’s corporate bond buying announcement. Also I look at a couple of academic papers on the lockdown inflation experience.
Sports bettors have discovered stocks (or stonks in the vernacular), and defaulting companies might just have found a saviour. For bond holders anyway.
Frank Partnoy wrote an article with that title in The Atlantic, and it’s getting a lot of attention. Partnoy says that CLO defaults are coming and they’ll bring down the US banking sector. Is that plausible?
GDP linked bonds have long been discussed as a good option for governments. Italy is now issuing one, aimed at retail investors initially, but could this catch on?
A huge and unexpected boost to hiring in the US last month saw 2.5 new jobs created, sending the unemployment rate down from nearly 15% to 13%. Credit is rallying hard, and US Treasury bond yields are rising sharply.
It’s all about positive surprises at the moment. The economic data is coming in slightly better than expected and the central banks are ramping up the policy response. As a result, risk assets are flying, but government bonds are underperforming.
blacklivesmatter. Economic slowdowns hit black families hard. On one estimate the economic impact of a downturn is 1.9 times more severe for a black family than a white one. Has the Fed got a responsibility here?
Two big defaults in the past few days, and more to come. Today’s episode also looks at rising U.K. debt/GDP.
Normally cutting rates sends a signal that the economy is getting a stimulus, that the amount of interest on savings is going to fall and therefore you should spend, spend, spend. But what if, as we move towards negative rates, it sends the signal that everything is broken and that actually you should save more to protect your family and business even though it will cost you?
Having been very sceptical about negative interest rates in the U.K. only a week ago, new Bank of England Governor Andrew Bailey seems to be changing his tune. And central banks around the world are also having this same debate.
With central banks and governments promising to support companies in multiple ways, including even buying the bonds of junk bond issuers, you might think that debt burdens don’t matter anymore. You’d be wrong.
In ancient times, at times of general economic distress, such as a crop failure, rulers would “wipe the slate clean” and cancel ALL society’s debts. There were winners and losers, but society as a whole benefitted. Coronavirus has caused debt burdens to explode upwards. Might we see something similar in the modern world?
Inflation turned negative in April, thanks to collapsing energy prices, but also as demand for consumer goods, like clothing, fell in lockdown. The Fed’s Jay Powell gives a speech today - will negative rates feature in response to negative CPI?
Negative yields are nothing new for most of the developed markets, but until the coronavirus hit, the US was a significant outlier. Last week the market’s expectations for the Fed shifted into negative territory for the first time ever. Is the Fed ready for the “minus sign”, and what would that do to the dollar’s ongoing strength?
“This Time is Different” was an economic hit when published in 2009. It’s a fascinating look at 800 years of government borrowing. But do the errors in its calculations undermine its message?
The US will be issuing around $4.5 trillion of Treasuries and Bills in 2020 - in this episode I suggest we look at demand, as well as supply when we consider what bond prices might do as a result.
Today I talk about bond issuance in both the credit markets and in government bonds. What’s the best way of issuing debt so that both buyers and sellers feel happy about the transaction?
There lots of noise this week about the US President’s idea that the Government should default on China’s $1 trillion UST holdings as “revenge” for Coronavirus. OMG.
Today’s FT has a great article about the slashing of interest rates in this Nintendo Switch game. A monetary policy petri-dish.
The annual Deutsche Bank Default Study came out yesterday. It’s always a brilliant read. Defaults are going to be high this year, but probably no higher than they would have been in the absence of Covid-19. Intrigued?
S&P kept Italy’s rating at BBB, and Italian government bonds are rallying. But with Moody’s also about to determine its possible action on keeping Italy as investment grade or not, the risks of a downgrade remain present. Elsewhere - the Bank of Japan announced unlimited bond buying...
I once wrote a blog about the possibility of the U.K. government cancelling the gilts held by the Bank of England as part of the QE programme. Is that now becoming the consensus?
As developed market bond yields retest their all time lows, EM is behaving differently. A dependence on foreign capital flows means that they have seen both their currencies fall, and their bond yields rise. And maybe that defines an Emerging Market relative to a developed market? Also today - oil!
The RBNZ suggested last night that they’d consider monetising NZ’s debt. Elsewhere we talk about the fall in bond yields vs currency performance, and the US’s “exorbitant privilege”.
Oil prices just collapsed to 20+ year lows, and a couple of high yield energy names have now defaulted, with more to come. In today’s episode we also discuss Central Bank balance sheets, and another Argentinian sovereign default.
US companies have aggressively borrowed from their bankers over the last month as their earnings disappear under economic lockdown. The rules of those borrowings allow the banks to put the businesses into default if they breach certain metrics. Many are now breaching, but the banks are pretending it didn’t happen - the scale of the problem is too big to cope with.
Last week the US Federal Reserve announced the most startling monetary policy action of any Central Bank in this crisis: it’s going to buy High Yield ETFs, and also will regard Fallen Angels as investment grade!
Well, they’d say not, absolutely not, no no no. But the government is going to start using the BoE as a source of financing and will run up overdrafts at the Old Lady. Twitter has decided that this is the first step towards MMT and helicopter money.
The “failure” of the Phillips Curve to show a good relationship between employment and the CPI has been a puzzle for economists. Markets are pricing in nearly a 50% chance of US deflation - is that overly pessimistic?
The US Federal Reserve pinned the Treasury yield curve at fixed levels during WW2. This caused some dislocations once the war was won, but eventually allowed the Fed to gain independence from the Treasury. With debt levels heading to wartime amounts again is there anything to learn from the Fed’s experiences in the 40s and 50s?
The idea that the eurozone was going to get together to issue Coronabonds to deal with the economic impact of the pandemic was always optimistic - but there’s more than one way to skin a cat, and this week we may see two other pan-European bodies, the ESM and EIB used to borrow cash instead. Also U.K. household inflation expectations leapt in March. Does that have implications for wage inflation when we get through this?
The latest data for client flows in the US mutual and ETF market show that the outflows might be moderating, and that high yield funds are very much in demand right now. Lots of cash sitting on the sidelines though.
There’s a great Andy Mukhergee article on Bloomberg which looks at the economic impact of the Black Death in the 14th century. It draws on Paul Schmelzing’s excellent Bank of England paper and looks at wages, consumption and borrowing. Today we look at the article and ask whether we should expect the same wage driven inflation when we come out of coronavirus lockdown.
Part 2: yesterday we looked at the extent of fiscal expansions around the world and the impact on debt/GDP ratios. Today we look at the three things governments can do to get debt levels down again when this is all over.
Part 1. Sovereign Debt to GDP ratios are going to increase by 10% to 25% over the course of this coronavirus crisis. It’s the right thing to do, but when this is all over how are we going to repay those bonds? In this episode I look at the scale of the problem; tomorrow, the solutions.
Fitch downgraded the UK’s credit rating on Friday, citing the increased borrowing it will need to take on the pay for the Coronavirus economic package. Is the U.K. really in increased risk of default as a result of the virus? Can rating downgrades be self-fulfilling prophecies?
It’s expected that there will be hundreds of billions of dollars of investment grade bonds getting “junked” this year as economic conditions deteriorate. Ford was downgraded to high yield yesterday. How much more is to come?
9 Eurozone nations have suggested that the bloc issues jointly guaranteed bonds to help finance the response to Coronavirus. Germany isn’t keen - yet. Where would bonds like these trade compared to bunds? Elsewhere - Ford gets downgraded to junk.
US inflation expectations have COLLAPSED through this crisis, and some market expectations for future prices elsewhere in the world are now anticipating deflation. What’s driving the fall, and how do we measure it.
The level of defaults priced in to corporate bonds - both investment grade and high yield is pretty extreme. How does it compare with the worst periods in history?