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Saturday 25 March 2023

So long, and thanks for all the fish (and Oil) So long, and thanks for all the fish (and Oil)

Investors have abandoned Norway’s NOK. The NOK is this year’s worst-performing G10 currency and is flirting with its all-time lows; it’s pretty much there if you strip out the COVID extremes. Some weakness is understandable. Household debt as a % of disposable income (chart below) is one of the highest in the world. Norway, like Sweden, is heavily exposed to variable rates; any changes should slow consumption growth as household debt-servicing costs increase. Countries in this situation find themselves in a bind. Continue to raise...

Uncle Jim's World of Bonds

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.

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.

March 2023

Silicon Valley Bank - A Unique Business Model

SVB is a big deal, but not for bond investors in larger US and European banks

What do you get when you have a $200bn bank fail in a high inflation, slow-growth, rising rate environment? While “contagion” or “global systemic risk” are reasonable answers, we don’t think either will ultimately prove accurate in the case of Silicon Valley Bank.

The return of the King: Cash makes a comeback

For a long time, it has made no sense to keep money under your mattress or invested in cash-like instruments (short dated, fixed return) such as money market funds, without facing an inflation-adjusted loss. Now, we find ourselves in an environment where aggressive hiking cycles globally have meant deep curve inversions across major markets and short dated yields sky rocketing over the last year. It is now possible to see returns of 5% in the US for virtually risk-free assets, if you assume there is…

Reverse factoring: a journey to improve disclosure

I work as a corporate credit analyst at M&G. I like my job, but I find it frustrating at times, for example when I have to deal with restated numbers and unresponsive management. I’m particularly annoyed by the lack disclosure around reverse factoring (also called supply chain financing), because I see that type of funding as a debt-like liability, but when it is not disclosed, I cannot be sure about my debt and leverage calculations which are key in my credit analysis. In addition reverse…

Japan – the land of the sinking sun

JAPAN – this won’t end well Japan has one last strategy – HOPE. Let’s quickly recap the last twenty-odd years of Japanese monetary and fiscal policy and look at where we find ourselves today. The fiscal numbers don’t look pretty, with debt as a % of GDP at 260% versus other major countries at circa 100%. The below table reads like a Stephen King Novel but is, in fact, the budget of Japan PLC. The issuance of Government debt finances 40% of annual expenditure (less…

The last lonely Brady bonds: would more make sense?

The Brady scheme was the eventual fix to the 1980s emerging market debt crisis. While most Brady bonds have been called or matured, two lonely bonds of reasonable size remain trading in global bond markets. Albania’s $225 million Brady bond was issued in 1995 and matures in 2025. Vietnam’s amortising Brady bond, issued in 1998, has its final payment scheduled in 2028. Each bond is backed by US Treasuries. These bonds would only be a historical relic, were it not for recent talk about the…

February 2023

Inflation in the US: Does 2023 have any nasty surprises in store for markets?

The February CPI print came in hotter than survey expectations at 6.4% YoY, throwing inflation rates off the path back to the 2% target. Is this just a small outlier, or is this an early warning sign for what’s to come in 2023?

The past two years have been a wild ride for inflation; headline inflation has soared from 1.4% in January 2021 to 9.1% in June 2022, and currently sits at 6.4%. This rapid growth has been easing following the Fed’s aggressive rate hikes in the second half of 2022, along with more hikes expected to be on the way in 2023.

A bond investor’s perspective on the UK

As with many countries right now, the UK is suffering from higher inflation and the prospects of lower growth. Rishi Sunak’s wish to halve inflation this year to circa 5% isn’t exactly earth shattering being that is what is currently being priced into the forward curve. Anything further would be welcomed yet seems doubtful as inflation is sticky, especially in parts of the economy that that cannot be controlled quickly (like rents and services).

Digital bonds – a new kid on the block

A brief press release recently from Europe’s largest and possibly oldest industrial manufacturer, announcing a short-dated, small-sized bond, seems hardly significant. In time however it may come to be seen as heralding a transformation of bond markets. Siemens, which is proud of its pioneering spirit since 1847, has issued a blockchain-based ‘digital’ bond. Just as ‘Big Bang’ altered the structure of financial markets, full digitalisation and democratisation of bond markets may prove as disruptive, with winners and losers.

Brazil trip notes – first-hand feedback from the EM desk

I just returned from a week-long research trip in Brazil where I met with several local investors and corporate bond issuers. From a fundamental standpoint, I came back more bearish on the country’s fundamental outlook. The macro outlook is challenging and low growth and high interest rates are taking their toll on various sectors. Policy risk is elevated with the new Lula government and the bond market is pricing it to various degrees.

January 2023

Capital Structure Gymnastics: valuing the equity of stressed credits using option maths

“It’s option value” – A frequent refrain by credit analysts explaining why the market ascribes varying levels of equity value to companies with debt trading at severely stressed levels. Cryptocurrency exchange Coinbase, for example, has unsecured debt trading close to 50% (c.$3.7bn outstanding), yet still has a market cap of $8.8bn; outdoor advertiser Clear Channel Outdoors has unsecured debt around 70% (c.$7.17bn outstanding), yet has a market cap of just $580mn.

Housing market timebomb – is Sweden just the start?

Housing market woes became a hot topic in 2022, with interest-rate hikes meant to combat accelerating inflation putting pressure on house prices globally. Combined with high starting levels for property values after the post-pandemic housing boom, many are predicting further declines going into 2023. Real estate downturns (defined as two consecutive quarters of falling prices) have been triggered in a number of economies including Canada, Australia, New Zealand and the Nordics.
One area where this trend is playing out most rapidly is Sweden, where house prices are falling at one of the fastest rates in the world.

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