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Long US Treasury bonds are overvalued by 250 bps. Discuss.

As we started 2014 the US Treasury market was expecting 10 year yields to be at 4.13% in a decade’s time. This 10 year 10 year forward yield, derived from the yield curve, is a good measure of where the bond market believes yields get to if you “look through the cycle”, and disregard short term economic trends and noise. I wrote about it here and suggested that we were approaching the top of th…

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Emerging market fixed income – 2014 performance

Emerging Market debt: 2014 returns post-mortem and 2015 outlook

2014 was quite an eventful year for Emerging market (EM) fixed income. After a period of strong performance which lasted all the way to September, markets corrected significantly in the latter part of the year as the escalation of the Russia crisis and the plunging oil prices triggered the most significant drawdown since the “taper tantrum” of June 2013. All in all, emerging markets still poste…

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EM Asia corporate bonds have outperformed in recent sell-off

After the December rout, where is the value in EM corporates?

It’s this time of the year when banks and other investment research providers have released their outlooks for the coming year. For the EM corporate bond asset class, Asia was forecast to be the best performer in 2015, with most top picks being in India and China.

Most 2015 outlooks were released in late November or early December, when EM USD corporate bonds were boasting a solid 6.1% total re…

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Default case study: “Ave Caesar, morturi te salutant”

“Hail Caesar, those who are about to die salute you” may well have been the gladiatorial epitaph of choice two millennia ago, but the junior creditors of Caesar’s Entertainment Operating Co are unlikely to feel the same way.

In 2008, TPG and Apollo Global Management, two powerhouses of the private equity industry, led a $30.7bn buyout of Harrah’s Entertainment Inc, the US gaming business. This …

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Duration, duration, duration – a review of bond market returns in 2014

This time last year many thought that duration management was going to be the key to success in 2014. Yields were expected to rise as the Fed weaned the market off QE and began to normalise rates. As a result, only the very brave would have been positioned long duration heading into 2014. To be positioned as such would presumably have taken some explaining, particularly when set against what se…

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A rallying bond market means duration lengthens

Either longer dated index linked gilts are very vulnerable, or the UK economy is

If at the beginning of 2014 you had made a list of what you thought would be the best performing fixed income asset classes globally for the coming year, it’s very unlikely you’d have put UK index-linked gilts at the top. It’s probably even less likely that you’d have put Argentina’s (hard currency) bond market in second place, especially if you had been told that Argentina would default in 201…

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The Chinese corporate bond market – a video

I was in Hong Kong a couple of weeks ago to find out more about the Chinese corporate bond market. To start with it’s huge, and growing rapidly. But it comes with some well-known challenges – the large weighting towards property debt, the lack of information about issuers (ratings tend to be done only by the domestic ratings agency), and perhaps most worryingly the issue of structural subordina…

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Corporate bond spreads

EM corporate bonds: spreads are attractive compared to developed markets

Emerging market (“EM”) corporate bonds are a fast-growing segment of the fixed income market. The hard-currency (USD, EUR, GBP and CHF) EM bond market has doubled in size since 2010 and is now worth over $1.3 trillion – which makes it as big as the US high-yield market. Including local-currency bonds, the Bank of International Settlements estimated that the EM corporate bond market was worth ne…

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Mini Bonds – who is buying them?

One of the many unintended consequences of structurally low interest rates over the past few years has been the emergence of mini-bonds in the UK. These are typically non-tradable debt instruments issued by companies directly to individual investors*. We’ve commented before on one such bond issued by Chilango, a London based vendor of Mexican food, and highlighted some of the risks relative to …

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Ten reasons to like US high yield today

Global growth concerns, fears of a less accommodative Fed, and limited high yield market liquidity coupled with complacent and crowded investor positioning has served to reprice the US high yield market over the past few months. Following on from the worst quarterly performance in Q3 2014 for some three years, the US high yield market arguably now offers a significantly more attractive entry po…

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