Bond Vigilantes

Recently, the Australian Prudential Regulation Authority (APRA) made waves by publishing guidance regarding the Aussie banks’ calls on capital instruments including Tier 2 instruments, as we touched on in yesterday’s blog on Asian financials. For background, banks’ capital instruments, which include Tier 2 and Additional Tier 1 (AT1) instruments, are forms of loss absorbing capital that count towards meeting banks’ overall capital requirements.

On 3rd November 2022, Heungkuk Life (HUKLFI), a Korean insurer, announced on that it would not exercise the call option to redeem its USD500mn perpetual, HUKLFI 4.475%, on the first call date of 9 November due to “extremely unstable financial market conditions” both domestically and internationally. While the non-call of the perpetual does not constitute an event of default, the decision surprised markets as the issuer had previously stated that it would call the perpetual. It also marked the first non-call from Korean financial institutions…

The latest US inflation report came in softer than expected, with headline inflation now at 7.7% YoY and core inflation at 6.3% YoY. Inflationary pressures eased a touch as the deceleration in CPI was generally broad-based. Core goods inflation turned negative for the month while core services ex-rents inflation decelerated (this was partially due, however, to a technical change in insurance inflation). Rents generally remains elevated, but will likely soften going forward reflecting the current state of the housing market.

Around COP 27, there has been renewed interest in climate-debt swaps, green bonds, and blue bonds. Sovereign debt conversions in Belize in November 2021, and Barbados in September 2022, are frequently cited examples that have eased debt pressures while increasing environmentally sound investment.

The World Economic Outlook released by the IMF in October has painted a pretty bleak picture for emerging market economies. They have experienced a sharper-than-expected GDP growth slowdown and high inflation amid much tighter global financial conditions and cost-of-living pressures. The 2022 GDP growth forecasts for most advanced and emerging economies have been revised down compared to April, with most notable revisions in China, India, and the US.

It’s that time of year again – Halloween and time for the Bond Vigilantes’ usual round up of the scariest charts in global finance!

With rising inflation and the cost of living crisis, 2022 has been a scary year for everyone. Turning our focus to markets, rising bond yields and CPI prints mean we have certainly found no shortage of scary charts either.

There has been a notable shift in tone from several ECB speakers over the past couple of weeks in that they are talking more explicitly about shrinking the ECB’s balance sheet (known as quantitative tightening or QT) in what looks like a coordinated attempt to prepare the markets for the ECB’s next phase of monetary policy. Euro-area inflation currently stands at 10% – a record for the single currency. Germany hasn’t seen this level of inflation since 1951 (during the Korean War). Before the pandemic,…

Quantitative tightening (QT) is due to start in earnest on the 1st November – just in time for Halloween! The Bank of England is scheduled to start a serious active sale programme of the assets it bought during QE, which was a ‘treat’ for the holders of the assets and was a policy measure they had to undertake to stimulate the economy as rates were at the lower bound. It is now time for the ‘trick’. The Bank describes on its own website why it…

Going into the Congress meeting, investors had been looking for signals to gauge if and how China’s zero covid policy will be relaxed, as well as whether there would be any near-term policy adjustments to the housing sector.

The political landscape in Latin America over the past 18 months – from Boric in Chile to Petro in Colombia more recently – has changed to varying degrees but only in one direction: to the left. Some have coined the change the pink tide, others the pink wave. I like the image of a pink tide, slower but mightier than a wave. This pink tide may expand in a couple of weeks if Brazil’s presidential election sees Lula winning, in what is expected to be…

Following on from Jim’s blog on Tuesday and yesterday’s extraordinary market events, I wanted to shine a light on the various actors in the collateral and liquidity markets and why we are in the eye of what I term as the liquidity ‘Haves and Have Nots’ storm. The ‘Have Nots’ As Jim explained, pension funds are/have been servicing ever increasing margin calls driven by the extreme moves in real and nominal rates. They are on a hunt for liquidity (cash) to service these calls at…

Following on from the recession blog we said we would discuss inflation: this is the big difference in the economic cycle this time around as illustrated in the chart below. The common cause of the current inflation according to many commentators is the supply shortage, whether that be commodities, manufacturing or labour. Central bankers frequently have pointed to these effects: “Supply-side constraints have gotten worse,” said Fed Chair Powell at the end of last year. “The risks are clearly now to longer and more-persistent bottlenecks,…

The economic backdrop post Covid remains one of great uncertainty regarding recession risks for credit, and inflation risks for bonds. We will attempt to address these issues in two blogs. The first will focus on our usual starting point over the years regarding the risk of recession; the second will explore the current inflation outlook from a fresh perspective, as we have not faced such high inflation in developed economies for many years. Over the years we have looked at 3 key indicators of recession…

I’ve not written a blog for ages, but since we’ve just relaunched the Bond Vigilantes website with a lovely new look and feel, I can’t resist.  Also there’s lots of stuff going on, including a really important bond market dynamic that I want to discuss here. In all the excitement about last Friday’s mini-Budget sending sterling down to a record low against the US dollar, and sending gilt yields rocketing (2 year gilt yields rose by 1% over two days), there’s a dangerous technical factor…

There are undoubtedly reasons to worry about taking credit risk today. Central banks are tightening fast. The Fed just raised rates by 75 basis points (bps) bps as markets expected, while the Riksbank raised its policy rate by 100 bps with more on the way from the European Central Bank, Bank of England and others. Deutsche Bank points out that the ratio of global hikes to cuts over a rolling 12-month period has been as high as 25:1 recently having not being above 5:1 over…