What should Mervyn do with his QE gilts? Free finance.

Jim recently discussed the merits of officially cancelling the gilts bought back through QE, so I thought I would discuss another option that maintains the status quo through the Bank of England (BoE) simply rolling over the QE gilts into new gilts at maturity.

In order to understand the results of this process it is useful to re-examine how QE works.

Simply, QE is the willing exchange of gilts…

Read the article

Deutsche Bank 2012 Default Study – Default bark far worse than the bite?

This week saw Deutsche Bank publish their 2012 Default Study, aptly subtitled ‘5yrs of crisis – The default bark far worse than the bite..’ The annual piece is particularly interesting, especially because the market now has five years of data since the onset of the great recession.

At the risk of failing to do an in-depth report justice it drew out several significant points for credit investor…

Read the article

If the government simply cancelled the £300 bn+ of QE gilts held by the BoE, who would be unhappy?

The UK sits unhappily at the very boundary of what debt burden is acceptable for a AAA rated economy.  If growth continues to disappoint, or if more austerity becomes socially impossible, the UK will be downgraded – and neither of these possibilities look very remote.

At the moment the UK public sector net debt to GDP ratio is about 63%, equivalent to about £1 trillion (these numbers exclude th…

Read the article

High Yield in the Post Lehman Era

We recently published an in-depth note on the high yield market . In it we consider some of the issues facing investors in the era of negative real interest rates and financial repression and how high yield as an asset class fits into the current paradigm.

Our main conclusions are:

  • Low interest rates and ageing demographics are enticing investors to high income generating assets.
  • High yield fi…

Read the article

UK economic recovery worse than Great Depression, and no sign of improving

It was announced this morning that the UK economy grew just +0.5% in 2011, a downward revision from +0.7% previously announced.  As the chart below from Citi illustrates, the UK economy has stalled.  UK real GDP is 4.1% below its pre recession peak, which makes this ‘recovery’ worse than the Great Depression.

The UK’s experience of the past few years is also considerably worse than Japan’s expe…

Read the article

Central banks’ poor forecasting records and why the Fed may hike rates before late 2014

Central banking has evolved substantially in recent decades. Part of this evolution has involved a move towards greater transparency around a central bank’s forecasts and operations. The reason for this shift is because it is believed by many economists that by having a central bank communicate its objectives and forecasts, economic agents like consumers and businesses will make better informed…

Read the article

Markets start to think about inflation again

Over the last few weeks we have witnessed a meaningful bounce in inflation breakevens in the UK, Europe and the US. When breakevens are rising, it is a signal that the fixed income market is anticipating higher inflation than has been priced in. It also means that index linked bonds are outperforming conventional bonds. In the UK, the linker gilt of 2016 has outperformed the conventional gilt b…

Read the article

Is bond market price action looking a bit like 1993-94? And the timing of fairytale 100 year bond issues.

1993 was a golden year for US Treasury investors, with 10 year yields falling from 6.7% at the start of the year to 5.3% by its end.  It felt like nothing could go wrong – and inflation had even fallen throughout the year from 3.3% to 2.7%.  Yet on 4th February 1994, the Fed hiked rates by 0.25%.  And they hiked again in March, by 0.5% in May and August, and a further 0.25% in November.  The an…

Read the article

Central Bank Regime Change: who cares about 2% inflation targets anymore? A chart.

For those clients who received our Panoramic fixed interest newsletter in December (the latest edition is out now by the way, with a detailed analysis of the global high yield market), you will have seen that I talked about Central Bank Regime Change as one of the key issues for fixed interest investors in the coming years.  What I meant by Central Bank Regime Change is this: the days of Centra…

Read the article

The Bank: Inside the Bank of England: the 10 competition winners are…

The answer was the Bank of England’s Inflation Report cost £4 when it was first published in 1993, and now costs £3, deflation of 25%.

Congratulations to the ten winners picked randomly:

  1. Tim Cockram – Chetwood Wealth Management
  2. Simon Bird  – Brewin  Dolphin
  3. Alex Brandreth – Brown Shipley
  4. Robert Harper – Brewin Dolphin
  5. Ali Treharne –  SFP Plymouth
  6. Mark Dobson – Charles Stanley
  7. R Knight – from A…

Read the article