Bond Vigilantes

Against the backdrop of stubbornly high – albeit receding – European inflation, the ECB’s Governing Council decided yesterday to raise its policy rates by yet another 25 basis points. This marks the tenth consecutive hike and lifts the ECB’s deposit rate, which had been at -0.5% only in mid-2022, to a whopping 4%. The burning question on many investors’ minds is, of course, was this the final hike of the cycle?

The kids may be back to school, but the summer weather seems to have saved itself for September here in the UK. A market that has stayed hot for a lot more of summer, however, is the US Dollar. The dollar has staged its strongest rally in over a year as the rhetoric of central banks needing to hold rates higher for longer has taken hold of markets. If this can be sustained, it will help the Fed’s fight against inflation by making imports cheaper…

The United Kingdom’s Government debt interest payments have been a topic of concern and scrutiny for many years. As one of the world’s largest economies, the UK has amassed a significant amount of debt, and the cost of servicing this debt has important implications for the nation’s fiscal health. The current state of UK Government Debt as of 2023 is circa £2.5 trillion, which is 100% of GDP and equates to £38,000 per person. On a comparative basis, the UK is not the worst, but…

It’s not just us: inflation needs a rest from time to time too. So far this summer, US inflation has been surprising to the downside and last week we got another encouraging report. Headline CPI rose 0.17% MoM while core was up 0.16% MoM. These numbers are consistent with 2% annual inflation.

Gabon has recently issued a debut $500 million blue bond, arranged by Bank of America and the Nature Conservancy. Credit enhancements, including political risk insurance from US International Development Finance Corporation (DFC) ensured the bond had an Aa2 rating from Moody’s, a level much higher than the sovereign’s Caa1/B credit rating. 

How should one approach investing in sukuks – Sharia-compliant bond-like instruments – as a manager of conventional funds? The recent issuance of an Additional Tier 1 (AT1) capital instrument by Abu Dhabi Islamic Bank (ADIB) provides us with an excellent case study of the problems we face when investing in this market. This deal, callable in early 2029, priced at a yield of 7.25%, which equates to a spread of roughly z+340bps. This seemed expensive as it was in line with where Emirates National Bank…

Amidst macroeconomic uncertainties and policy headwinds, Asian investment grade (IG) corporate bonds have demonstrated remarkable resilience and relatively benign drawdowns compared to peers in other regions, despite interest rate volatility and credit challenges in the recent years. This year, Asian IG corporates have also performed largely in line with the US IG corporate bond market, while modestly outperforming the Emerging Market (EM) and Euro IG corporates (in local currency terms). Navigating the path ahead While credit-specific challenges exist, the fundamentals of Asian IG corporates remain…

Since the 2008 global financial crisis, central banks worldwide have responded with strong monetary policy measures to prop up economies and promote economic growth. Central banks have slashed interest rates to zero, some into negative territory, and embarked on a path of quantitative easing (QE). These policies, arguably vital at times to prop up confidence and avoid a catastrophic outcome, have finally induced the stated aim of increased inflation. For years economists had warned that these policies would result in runaway inflation, but the reality…

One of the well-known effects of inflation, albeit seemingly rarely discussed in recent times, is its ability to erode the value of debt. The (fixed or nominal) amount of money one has borrowed begins to shrink in comparison to one’s income as prices, wages, and earnings rise. A rising nominal income increases a borrower’s ability to pay. The same is true of governments. All else being equal, higher prices, wages and earnings all result in higher tax receipts, and therefore should improve their fiscal position….

An inverted yield curve refers to a situation in which short-term interest rates are higher than long-term interest rates for government bonds of the same credit quality. Inversion is considered unusual because, under normal circumstances, longer-term bonds tend to have higher yields than shorter-term bonds.