Uncle Jim’s World of Bonds

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?

Something for everyone in today’s bond podcast...

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!