What the Past Gets Wrong About the Future What the Past Gets Wrong About the Future

Robin Wigglesworth, author of Trillions and editor of the Financial Times’ blog Alphaville, has come to market with a new book and I’ve been entrusted with reviewing it.Though an avid reader, I find book reviews surprisingly difficult. Give too little or too much away, there’s little reason for anyone to read it. But, in the interest of avoiding spoilers, I will say this: Think you know about bonds? Think again. Bonds are now so firmly embedded in the financial landscape, that it is easy to…

Take two bonds from one issuer, with identical seniority, rating, and credit risk. Yet the credit spread, the portion of the yield above the risk-free rate that compensates you for taking that risk, is meaningfully wider versus government bonds than it is versus interest rate swaps – wide enough for it to be worth paying attention to. This is particularly relevant for strategies that aim to isolate credit risk and hedge away interest rate exposure. In those strategies, the instrument used for interest rate hedging…

The Oxford Dictionary definition of a bond (the finance version) is a document issued by a government, local authority, or company promising to repay borrowed money with interest over a long-term period. In a non-finance sense, a bond is a strong feeling of friendship, love, or shared ideas and experiences that unites people. In recent history, most investors will agree that bonds haven’t delivered a very attractive level of interest.

At around 150 basis points over Bunds, French ten-year government bonds look tempting. The spread is exceptionally wide by France’s historical standards. For investors accustomed to treating France as a core European sovereign, the instinct is to buy the dislocation and wait for normality to return. But that instinct risks anchoring to a past that no longer provides a reliable guide.

Anyone who spent too much time on YouTube in the early 2010s will probably remember the Honey Badger. The Honey Badger is part of the Mustelidae family which includes Wolverines, Otters and, you guessed it, Badgers. They live mostly in Africa, the Middle East and India…and oh, they are super cute too.

Across much of the developed world, governments are spending an increasing share of their tax revenues servicing debt.

The bond market has taken control from Warsh and Bessent, and in some ways is now testing or even tormenting them.

For those who follow bank returns for a living, Japan’s push toward low-to-mid-teen RoE/RoTE (return on equity/return on tangible equity) over the medium term is one of the most striking re-ratings in the sector – a genuine regime change against the mid-to-high single digits of the past few decades.

For most of the euro’s existence, investors have operated under an implicit assumption: Germany would always be there.

It is 20 years ago this month that I sat in a pitch and listened to an investment bank describe their latest stroke of genius. In 2006, the Constant Proportion Debt Obligation (CPDO) was hailed as a financial innovation that appeared to offer something for nothing: a AAA-rated security paying a meaningful premium over cash.

European natural gas prices are rising again, storage levels are lower than expected, and memories of the 2022 energy crisis remain fresh. But does this really constitute a new energy crisis for Europe, and more importantly for bond investors, does it change the ECB’s policy outlook?

Why aren’t we talking more about El Niño?

In a world of tight credit spreads, one rating bucket flashes value. The European CCC index offers 1,306 bps over government bonds, suggesting generous compensation for taking credit risk.

We previously blogged on which area of government bond curves investors should have exposure to if they want to receive the greatest benefit from the passage of time. In a normal/upwardly sloping yield curve environment, the yield of a bond will fall (and its price will rise) the closer it gets to maturity. Or, as it rolls down the curve.