Not quite the end of the world
January 11, 2018

Mint - Blain's Morning Porridge

"But what a fool believes no wise man has the power to reason away.…."

The Morning Porridge is unrestricted market commentary freely available to all qualified investors on an unsolicited basis. It is not investment research.

It's going to be a short comment this morning due to doing some media-commentary stuff earlier. Yesterday wasn't quite the end-of-the world many Bond Market Meltdown the headlines predicted. US ten-yr rates breaching 2.5 percent did not cause the entire bond market did not vanish in puff of logic as the realisation yields are set to rise set in. In fact, yesterday's US treasury auction went rather well. The hollow threat of China selling its treasuries was replaced by the sober realization there isn't really much else they can invest in – even the Chinese later said it was "fake news".

As bond market gurus like Gross and Grundlach weighed in with negativity, I was expecting to be writing a note about markets over-reacting to bad news – thus throwing up opportunities. Instead it's possible markets have under-reacted. This morning comments abound with chatter about how nothing has really changed; the search for yield and value continues, and we've had folk bottom-fishing and looking for cheap offers. No one was apparently tempted or panicked into being a forced seller yesterday.

However, the market mood is definitely changed. We know there is a very serious debate being held across fixed income departments in the investment community: just how much and how quickly will the dramatic spread compression of the last few years be undone by the end of the bond bull market? What are the consequences for investment books, how to hedge it, and how to play it? Hedge funds and credit are all playing curve games and looking for the next trade. I suggest they keep a very close eye on linkers and other inflation plays as well.

Much money has been made investing across the tightening credit spectrum these past few years. It feels that party has come to an end. The mood was summed up by a conversation I had with one investor yesterday as I tried to sell him a large block of peripheral European covered bonds: "Bill, even by your standards this is cheeky: you want me to buy a big block of bonds someone else wants to sell so they can realize massive profits… and you want me to do this on the very day the bond market turns decisively bearish?"

His comment is to the point: who will be the last fool buying spread product?

We're trying to figure exactly how the end of quantitative easing distortions and rising/normalized bond yields play out across the credit spectrum. Highest risk will, of course, be US credit, starting with high yield. Least volatile will be the SSA (supranational, sub-sovereign and agency) credits closest in quality to the proverbial risk-free rate. One big question is Europe where QE (to the tune of EUR 30 billion a month) continues. We doubt European credit will remain entirely immune to the effect of wider US spreads.

More widely, Chief Investment Officers are trying to figure out the consequences of a bond bear market across all asset classes. What are the spillovers into stocks? One factor driving tighter stocks has been stock buybacks and mergers and acquisitions funded and fuelled by ultra-low interest rates. These are no longer going to be such significant drivers. And how about property – where higher rates will impact still cash-strapped underpaid and heavily indebted middle classes? Or in the UK where distortions include the homebuilders making off like bandits with the government's Help-To-Buy electoral bribes?

So much to think about. How long before we get a headline saying Goldman Sachs are predicting $200 oil? (It happened..) Meanwhile, I think the Norwegians might be on to something as I read their sovereign wealth fund is looking to further broaden its remit to include Private Equity and, soon, infrastructure. That's probably the way to go as the Great Financial Crisis 2017-2023 moves into its next phase: correcting the imbalances caused by ten years of Financial Asset Inflation and Distortion!

Full service tomorrow..

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners





This site, like many others, uses small files called cookies to customize your experience. Cookies appear to be blocked on this browser. Please consider allowing cookies so that you can enjoy more content across assetman.net.

How do I enable cookies in my browser?

Internet Explorer
1. Click the Tools button (or press ALT and T on the keyboard), and then click Internet Options.
2. Click the Privacy tab
3. Move the slider away from 'Block all cookies' to a setting you're comfortable with.

Firefox
1. At the top of the Firefox window, click on the Tools menu and select Options...
2. Select the Privacy panel.
3. Set Firefox will: to Use custom settings for history.
4. Make sure Accept cookies from sites is selected.

Safari Browser
1. Click Safari icon in Menu Bar
2. Click Preferences (gear icon)
3. Click Security icon
4. Accept cookies: select Radio button "only from sites I visit"

Chrome
1. Click the menu icon to the right of the address bar (looks like 3 lines)
2. Click Settings
3. Click the "Show advanced settings" tab at the bottom
4. Click the "Content settings..." button in the Privacy section
5. At the top under Cookies make sure it is set to "Allow local data to be set (recommended)"

Opera
1. Click the red O button in the upper left hand corner
2. Select Settings -> Preferences
3. Select the Advanced Tab
4. Select Cookies in the list on the left side
5. Set it to "Accept cookies" or "Accept cookies only from the sites I visit"
6. Click OK

Mint - Blain's Morning Porridge

"But what a fool believes no wise man has the power to reason away.…."

The Morning Porridge is unrestricted market commentary freely available to all qualified investors on an unsolicited basis. It is not investment research.

It's going to be a short comment this morning due to doing some media-commentary stuff earlier. Yesterday wasn't quite the end-of-the world many Bond Market Meltdown the headlines predicted. US ten-yr rates breaching 2.5 percent did not cause the entire bond market did not vanish in puff of logic as the realisation yields are set to rise set in. In fact, yesterday's US treasury auction went rather well. The hollow threat of China selling its treasuries was replaced by the sober realization there isn't really much else they can invest in – even the Chinese later said it was "fake news".

As bond market gurus like Gross and Grundlach weighed in with negativity, I was expecting to be writing a note about markets over-reacting to bad news – thus throwing up opportunities. Instead it's possible markets have under-reacted. This morning comments abound with chatter about how nothing has really changed; the search for yield and value continues, and we've had folk bottom-fishing and looking for cheap offers. No one was apparently tempted or panicked into being a forced seller yesterday.

However, the market mood is definitely changed. We know there is a very serious debate being held across fixed income departments in the investment community: just how much and how quickly will the dramatic spread compression of the last few years be undone by the end of the bond bull market? What are the consequences for investment books, how to hedge it, and how to play it? Hedge funds and credit are all playing curve games and looking for the next trade. I suggest they keep a very close eye on linkers and other inflation plays as well.

Much money has been made investing across the tightening credit spectrum these past few years. It feels that party has come to an end. The mood was summed up by a conversation I had with one investor yesterday as I tried to sell him a large block of peripheral European covered bonds: "Bill, even by your standards this is cheeky: you want me to buy a big block of bonds someone else wants to sell so they can realize massive profits… and you want me to do this on the very day the bond market turns decisively bearish?"

His comment is to the point: who will be the last fool buying spread product?

We're trying to figure exactly how the end of quantitative easing distortions and rising/normalized bond yields play out across the credit spectrum. Highest risk will, of course, be US credit, starting with high yield. Least volatile will be the SSA (supranational, sub-sovereign and agency) credits closest in quality to the proverbial risk-free rate. One big question is Europe where QE (to the tune of EUR 30 billion a month) continues. We doubt European credit will remain entirely immune to the effect of wider US spreads.

More widely, Chief Investment Officers are trying to figure out the consequences of a bond bear market across all asset classes. What are the spillovers into stocks? One factor driving tighter stocks has been stock buybacks and mergers and acquisitions funded and fuelled by ultra-low interest rates. These are no longer going to be such significant drivers. And how about property – where higher rates will impact still cash-strapped underpaid and heavily indebted middle classes? Or in the UK where distortions include the homebuilders making off like bandits with the government's Help-To-Buy electoral bribes?

So much to think about. How long before we get a headline saying Goldman Sachs are predicting $200 oil? (It happened..) Meanwhile, I think the Norwegians might be on to something as I read their sovereign wealth fund is looking to further broaden its remit to include Private Equity and, soon, infrastructure. That's probably the way to go as the Great Financial Crisis 2017-2023 moves into its next phase: correcting the imbalances caused by ten years of Financial Asset Inflation and Distortion!

Full service tomorrow..

Bill Blain

Head of Capital Markets/Alternative Assets

Mint Partners



Free subscription - selected news and optional newsletter
Premium subscription
  • All latest news
  • Latest special reports
  • Your choice of newsletter timing and topics
Full-access magazine subscription
  • 7-year archive of news
  • All past special reports
  • Newsletter with your choice of timing and topics
  • Access to more content across the site