Why does UK government guaranteed Network Rail keep issuing debt in its own name – and at a higher cost?

Network Rail, the organisation that owns and manages the UK’s rail infrastructure, has just issued more of three tranches of its index-linked corporate bonds.  These bonds are, like all of Network Rail’s debt, rated AAA and fully guaranteed by the UK government (the business was effectively nationalised in 2002 having bought Railtrack out of administration) .  These bonds were issued with sprea…

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The UK’s AAA rating looks increasingly vulnerable. Growth negative, borrowing up. It might not matter though.

On 14th February this year, Moody’s put the UK’s AAA credit rating on negative outlook.  This means that the agency says there is a 30% chance of the UK being downgraded within the next 18 months (i.e. by mid 2013).  A month later, Fitch moved the UK’s AAA rating to negative too – for them this means a slightly greater than 50% chance that there is a downgrade within the next two years.  At the…

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Lonesome George (Osborne) should get rid of one and two penny coins

Some sad news has reached us on the bond desk. Lonesome George, a giant tortoise that lived in the Galapagos Islands, has died. Lonesome George was known as the rarest creature in the world because he was the last known individual from his subspecies. Which is kind of relevant, as today’s blog will be covering another endangered species – one penny and two pence coins.

It was announced earlier …

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Should Europe let the single currency go to save the Union?

Today is the day on which football is going to meet the Eurozone crisis when Germany and Greece compete in the Euro Cup’s quarterfinal. Spectators will be watching closely any gestures by Angela Merkel sitting in the stadium next to other political and executive representatives, any behaviour (and banners) of both team’s supporters inside and outside of the stadium, and any appearance and words…

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German government bond yields may need to get very negative for the euro to weaken much further. And it could easily happen (update)

In January I argued that negative German government bond yields would be a rational response to the rising probability that the euro breaks up and Germany reintroduces the Deutsche Mark (see here).  This was because German government bonds have significant optionality.  Assume that the Eurozone is forced to reintroduce national currencies – if you are living in Spain, then a German government b…

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Americans are inconsistent in how they believe the budget deficit should be tackled. But growing signs of pragmatism?

It looks as if we might see a repeat of 2011’s brinkmanship regarding the US budget – remember that this game of chicken between the Republicans and Democrats was a contributory factor to S&P downgrading the US from AAA.  Few expect American politicians to make progress on debt matters until after November’s elections – but that doesn’t leave them long to prevent many automatic cuts to spending…

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Financial salvation not repression

There have been a lot of investors and commentators talking about financial repression. The fact that nominal interest rates are set at or close to zero, and the subsequent transmission of these low returns along the yield curve means that returns in both nominal and particularly real terms are historically scant. This is seen as a government and central bank policy that is punishing savers.

Ho…

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Office of National Statistics or Office of National Savings? The Future of the UK’s RPI-CPI wedge

There has at almost all times been a ‘wedge’ between RPI and CPI, given different calculation methodologies (arithmetic mean vs geometric mean, respectively), different items within each, and different weights of these different items. The long term difference has on average seen RPI at 0.5% to 0.8% more than CPI. Recent changes, though, saw the wedge widen in 2007 to more than 2%, and to almos…

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High Yield Default Rates Finally Starting to Rise

Default rates for high yield bonds have started to rise from a low level over the past few months. The trailing last 12 month default rate for Global High Yield was 2.7% in April, having bottomed out at 1.8% in October 2011 according to data from Bank of America Merrill Lynch.  This in itself is not unexpected as default rates were running at historically low levels, helped by very loose moneta…

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Bail-ins: Damned if we do; damned if we don’t

We have written on numerous occasions about the hitherto inseparable links between sovereigns and banks, and we have also written about the benefits of writing down bonds to create capital  (see The New Era for Bank Bonds: Send In The Clowns? and Equitisation of bank capital bonds) . In 2007 the global markets woke up to the fact that the US subprime market was blowing up, and in 2008 realised …

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