The volume of BBB corporate bond issuance has exploded since the global financial crisis, with BBB bonds increasing from 23% to 50% of all outstanding investment grade debt. But would a recession-driven increase in the number of BB rated names (due to downgrades) create opportunity?
With the European Central Bank spelling out monetary policy for the next eighteen months, they could be a victim of developments elsewhere. Against a backdrop of slowing Eurozone growth and lacklustre inflation, the US seems likely to hike several times and increase Treasury supply by over $1 trillion, potentially tightening global credit conditions significantly and leaving Europe exposed.;
Physical gilts have generally offered a yield pick-up over equivalent swap-based exposure. Yet this premium has declined over the past two years as pension funds have continued to invest heavily in gilts to match liabilities. Let's consider how much this premium might have to fall for investors to swap bonds for swaps.;
Given our longer-term views around the structural challenges facing the global economy, we struggle to see how inflation can rise meaningfully for any prolonged period of time. That said, while cyclical improvement does not override secular forces, a period of synchronised global growth is challenging the consensus narrative that inflation ‘volatility’ is dead.;
Unlike their US or Eurozone counterparts, UK pension funds will readily pay quite a premium for inflation protection. However, that premium is relatively unattractive for multi-asset investors, who we think can find better ways to manage UK and global inflation risks.;
At times, over 50% of fixed income managers outperform their benchmark indices. Understanding the drivers for that is important for manager selection, but far too often it's attributed to the wrong causes. It's time to pulp the fiction and instead recognise the roles that non-benchmarked investors and new issue premiums play.;
In pricing fixed income securities, a lot hangs on the difference between the mean, median and mode. Markets reflect a probability-weighted average of potential outcomes (i.e. the mean); policymakers typically focus on the single, most likely outcome (i.e. the mode). Thinking carefully about the difference has important implications for how we view interest rate risks.;