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Tuesday 19 March 2024

Join Jim for his annual review of a busy 2023 for fixed income markets, which has put bonds back in fashion again. There is a lot to cover – central bank decisions, the credit environment and the everything rally into the end of the year. What can we expect for 2024? Jim looks at the prospect of government bond issuance, economic slowdowns and the busiest election year in history!

Uncle Jim’s World of Bonds is a regular podcast by Jim Leaviss, Chief Investment Officer Fixed Income at M&G Investments. According to Jim, 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.

In this week’s podcast episode, Jim dives into the dynamic world of finance, economics and trends that are shaping our financial future. From paying homage to the late Charlie Munger, Warren Buffett’s right-hand man and a titan of value investing, to dissecting the latest shifts in the bond market and the intriguing twists in Federal Reserve policies.

Uncle Jim’s World of Bonds is a regular podcast by Jim Leaviss, Chief Investment Officer Fixed Income at M&G Investments. According to Jim, 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.

Dave Covey is M&G’s Head of Credit Research, and his specialist subject is financial credit. I caught up with him in this podcast, spending 30 minutes talking about the valuation of bank bonds (why are they so wide compared with traditional credit?). We also took a look at the ‘accidents’ in the financial system so far in 2023 (for example the Credit Suisse AT1 blow-up, and Silicon Valley Bank’s collapse).

I hope you enjoy listening to it.

We recently held our annual Bond Vigilantes Day, here at our offices in London.  With fixed income markets trading at yields many investors may have never seen in their careers, the timing for the event was pretty interesting – although valuations have become even more compelling since (!).

You can watch the video presentations from our fixed income team below.  I hope you find them useful.

Scroll down to find:

  • Jim Leaviss on the Treasury market’s valuation
  • Richard Woolnough on the macro environment and disinflation
  • Ben Lord on inflation
  • Claudia Calich on emerging market debt
  • James Tomlins on high yield
  • Panel discussion hosted by Andrew Eve, featuring Eva Sun-Wai, Matthew Russell and Head of Credit Research, Dave Covey

Loathe as I am to give the oxygen of publicity to rival podcasts talking about the bond markets, I can make an exception for those where I am the surprise guest.  So I commend the A Long Time in Finance podcast run by Neil Collins and Jonathan Ford.  Not only do they have high production values – they use microphones rather than shout at the iPhone like I do on Uncle Jim’s World of Bonds – but they also have cover art designed by Charles Peattie, who does the brilliant Alex cartoon in the Daily Telegraph.

Last week, Neil and I (Jonathan had overslept) talked about the horrors of the bond markets in recent months, and the problems around increasingly high levels of government borrowing. You can listen below.

A Long Time In Finance
A Long Time In Finance

The long view of finance, markets and money as seen by two veteran City editors, Neil Collins and Jonathan Ford. Sponsored by Briefcase.News


Hosted on Acast. See acast.com/privacy for more information.

As Good As Gold?
byJonathan Ford and Neil Collins

It’s more than a decade since an American investor described the UK’s gilts market as resting “on a bed of nitroglycerine”. But with government bonds facing a plethora of troubles right now, from surging issuance driven both by current deficits and monetary policy, to persistent inflation, it’s time to turn again to UK investor and self styled “bond vigilante, Jim Leaviss of M&G to ask if there has ever been a worse time to hold a gilt.

Presented by Neil Collins, with the somewhat tardy participation of Jonathan Ford.

With Jim Leaviss.

Produced and edited by Nick Hilton for Podot.

In association with Briefcase.News


Hosted on Acast. See acast.com/privacy for more information.

Source: Spotify


And if you haven’t been listening to Uncle Jim’s World of Bonds, links to all episodes are on the Bond Vigilantes website: Uncle Jim’s World of Bonds

If you don’t get the books you want on Christmas Day, and you’ve already seen Love Actually, I recommend taking a listen to these ‘A Long Time in Finance’ podcasts by Jonathan Ford and Neil Collins.  

The two I’ve linked below (Spotify, but also on Apple Podcasts) cover the history of the UK’s national debt, and are absolutely fascinating – although I would say that as I feature in the second episode, talking about the recent experiences of government borrowing in the QE era, and the prospects of lots more bond issuance in the years to come, on top of QT, Quantitative Tightening, where the central banks start selling their QE bonds back to the market.

I also enjoyed their podcasts on the collapse of Northern Rock.  Give them a listen.

Part One

Part Two

I chatted with Alan Blinder last week about his brilliant new book on US economic history.  Alan was Vice Chair of the Federal Reserve from 1994 to 1996, and also served on Bill Clinton’s Council of Economic Advisers, where he faced off against ‘real’ bond vigilantes.  He’s now an economics professor at Princeton University.  In our interview we discussed the developments in US economic policy from JFK’s ‘New Economics’, through monetarism and Volker, and to QE and the present day.  I wholeheartedly recommend the book to anyone at all interested in economic history – this is a ‘must read’ for bond investors.

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.

Source: M&G, Bloomberg (27 September 2022).

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 lurking in UK bond markets that we mustn’t ignore. Toby Nangle, formerly a multi-asset fund manager, identified it in an excellent Financial Times article in July this year. 

The piece points out that there are £1.5 trillion of assets held by UK pensions that have been hedged in so-called LDI trades.  LDI (Liability Driven Investment) helps to match pension funds’ liabilities (future payments to pensioners) with the schemes’ assets.  In a simple model this matching could be done by buying gilts of similar durations to the liabilities – if you owe your retired employees a collective £1 million in 2046, then you could buy a gilt maturing in that year.  Or if you buy a quality corporate bond with a higher yield (a lower price) you can assign less capital to that liability, and use the extra cash to invest in a growth asset like equity, property, or private assets.  Going further, you could use interest rate swaps or inflation swaps to match your duration liabilities.  This means that you only have to put up some initial margin for the trade, and pay or receive collateral as market yields change (think of it like a contract for difference on a yield).  If yields fall you would receive margin, and if yields rise the pension fund must pay margin to the counterparty.  Using swaps gives the pension scheme far more capital to assign to those more interesting asset classes with high potential returns rather than having it tied up in boring gilts. 

As Toby points out, the rise in gilt yields over the past year or so has been beneficial for many underfunded pension schemes – the value of future liabilities has fallen, so underfunded schemes become less underfunded.  But a sudden rise in gilts has significant implications for pension funds using swaps to hedge liabilities.  Collateral calls for margin payments will be large given the scale of the move in long dated bond yields, so this means that many schemes may have to raise cash by selling physical assets elsewhere in their portfolios – and in the dash for higher yields and higher returns, some of these will be in less liquid asset classes, perhaps leading to spread widening and discounts from expected value on sale.  To quote Toby, ‘while rising yields are good news for pension scheme funding levels, they look a likely catalyst for a further liquidation of risky assets’.

Whilst this is a dynamic specific to pension funds using swaps, there’s a wider collateral implication from the recent turmoil in UK assets – and I’ve no real idea of its scale.  Most UK based investors, and especially bond investors, buy overseas assets and hedge away the currency risk.  The sterling corporate bond market has shrunk dramatically relative to other global capital markets, thanks mainly to the continued growth of the euro-denominated credit markets over the past years, and many issuers no longer borrow in pounds.  UK corporate bond investors will therefore routinely look globally for the most attractive credit yields in either euros or dollars once hedging costs or gains are considered.  Like interest rate and inflation swaps though, hedging is done via the use of derivatives – often foreign exchange forward contracts. 

As an example, I might buy a bond issued in euros by Telefonica.  To eliminate the risk that the euro falls in value and thus wipes out the additional return I anticipated, or more, I sell euros of a similar value to the bond I bought in the forward FX market, and buy sterling.  Fund investors are therefore exposed only to the pound rather than to FX movements.  Like other derivatives though, changes in price of the underlying asset lead to collateral movements.  Given the 20% fall in the pound against the US dollar this year, and the recent sharp falls in the past week, if you had bought a dollar bond and hedged it, the dollars that you have effectively sold ‘short’ against sterling as the hedge have rallied, and the counterparty to the FX hedge will call for a collateral payment.  Whilst most funds will hold some cash and extremely liquid government bonds against such moves, the size of the recent turmoil probably means that many investors will be having to liquidate credit and other less liquid assets in order to meet these collateral calls.

Whilst inflation, central banks, and *cough* government fiscal decisions will determine the overall direction of bond yields over coming months, don’t discount the technical dynamics too. The dash for collateral could be a big factor in the short term for the UK.

With COP26 underway in Glasgow, I caught up on Friday with Fund Manager Randeep Somel who works on climate solutions strategies and has been following the conference. I asked him what progress is being made and what the implications might be for markets. How much debt will governments need to issue to achieve their targets and could the trillions of green investment needed lead to Greenflation in an already inflationary economy? And could we see a market-based solution to emissions in the form of a global carbon taxation framework? We discussed whether COP26 has been a success, the roles of the US, China and Russia and the biggest challenges that remain.

M&G emerging market fund manager Greg Smith has written a fantastic new book on the African debt market, and the different challenges and opportunities that the diverse nations of that continent face.  In this short 15 minute video, I talk to Greg about the important issues that his book raises, and ask the important question – is Africa heading towards a new debt crisis, or have things changed since the debt relief wave of the 1990s?  Greg’s fascinating book is out now

Author: Jim Leaviss

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