Uncle Jim’s World of Bonds

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 w...

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?