To herd investors into junk bonds and equities was no trouble at all—ZIRP and QE and a little rhetorical encouragement did the trick. To manage a comprehensive exit from those overvalued positions will prove a tougher undertaking. —James Grant, Grant’s Interest Rate Observer, August 8, 2014 For another example, please see our June 2, 2014,…
Most emerging markets debt assets are not priced to achieve investors’ objectives Over the last decade EM currencies have appreciated significantly against the US dollar in real terms and seem unlikely to generate attractive returns going forward given limited carry. Local currency EM sovereign bonds have attractive nominal yields, but real yields, which drive returns,…
Given that credit creation is the raison d’être of modern central bankers, the fact that European bank lending remains anemic despite a plethora of new measures from the European Central Bank (ECB) seems to us substantial cause for concern. The ECB’s pronouncements and alphabet soup of new programs have been remarkably effective at bringing down…
The market for labeled green bonds—bonds whose proceeds are specifically “ring-fenced” for environmental or climate mitigation or adaptation projects—has grown rapidly since the first green bond issue in 2008. Growing diversity of issuers, larger average issuance size, and estimated full-year 2014 issuance of $40 billion (half in corporates) all suggest that the green bond universe…
The launch of the new Treasury floating rate notes has been a successful venture The initial auction for Treasury FRNs saw aggressive participation, with a high bid-to-cover ratio. The ratio came down slightly in subsequent auctions. Quarterly issuance has so far exceeded early predictions, and these securities have already assumed an important place in the…
Yes, but prepare to average back in as soon as rates approach fair value, and consider moving out to the longer end of the curve. We recommend maintaining neutral allocations to risky assets, but are placing a greater emphasis on diversification given we are at a more advanced stage of the economic and market cycle…
Summary Observations: Fiscal Year 2014 US equities returned 24.6% in the fiscal year ended June 30, 2014, ranking 31st in 114 fiscal years of data. The health care, information technology, and materials sectors all returned above 30%. All developed markets ended the fiscal year in the black, with Europe ex UK the best-performing region and…
Bankers are fond of saying “bad loans are made during good times.” With equity markets reaching new highs, volatility and interest rates hovering around historic lows, positive economic growth, and increased merger activity, we could characterize today’s environment as the “good times.” Since credit markets run in cycles alongside the broader economy, investors need to…
The big drop in US Treasury yields this year has once again confounded the consensus. Benchmark ten-year Treasury yields have declined from 3% to around 2.5% in under five months. Investors that took duration risk were handsomely rewarded, as 30-year long bonds have returned 12.2% year-to-date through May 23, the best performance over this period…
Parts of China’s “shadow banking system”—broadly defined as the non-bank credit and funding markets—have some troubling similarities to US securitization markets circa 2007–08. Specifically, the “guaranteed returns” and off–balance sheet nature of certain products—as well as a “borrow short and lend long” asset-liability mismatch—are worrisome features, particularly considering that the area, which barely existed in…