All posts in category: Corporate Bonds (16)

The January Effect

Wednesday, December 20th, 2023

Hangover or Party On

US investors have enjoyed a year’s worth of returns in seven weeks. This has been a rally of everything – except oil. Even real estate has had its moment in the sun. US Equities are approaching overbought territory and will probably get there by the end of December. US Treasuries – long and short – will get there in January, at the current rate of progress. But US and European credit is already there. There has to be some sort of reaction to recent strength. We expect credit markets to weaken first, which will be used to justify the recession narrative, which will then impact equities. Government bonds may continue their rally for a while, but we think the big theme for the year will be the US budget deficit. Round 1 is in January, the next one is in Q4. Bond vigilantes are not dead, just sleeping.

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Focus on Fixed Income

Friday, November 17th, 2023

High Yield has the best yield to volatility ratio

Our top-down models are now overweight fixed income, so maybe it is time to work out exactly which categories we want to own and why. We have always liked the yield to volatility ratio, chiefly because it is a good lead indicator of the Sharpe ratio, which an asset will deliver. It contains more information than a study of spreads relative to benchmark, and avoids the underlying assumption that these are somehow mean-reverting. High Yield scores very well on this metric and has done for most of the last two years, which is why we have it as the only category in our fixed income model, where we are overweight relative to benchmark.

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Something Is Going to Break

Friday, May 13th, 2022

Volatility has entered the danger zone.

Realised volatility continues to march higher every week and we have now got to the danger zone, where this creates the conditions for more volatility – especially if the FOMC is committed to much tighter monetary policy. In these circumstances, traditional valuation metrics lose a lot of their power and investors should assume that markets in one or more major asset classes will become disorderly. We think this has already begun in Nasdaq, Italian government bonds and the Chinese yuan. Other assets, which may follow in due course, include US High Yield, credit ETF’s and US housing.

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Should We Be Worried?

Friday, February 18th, 2022

Investors need to price the risk of recession in 2023

A recession in 2023 is not our central case, but investors ought to price the risk of it happening, in order to reduce the probability that it will. We would be surprised if the Federal Reserve were to raise rates seven times in 2022, mainly because that would automatically cause the consensus to reduce its forecasts for US growth in 2023. The Fed’s hawkishness in 2016 had a similar effect and we see early signs of this happening in two of our main models. Investment Grade has hit a five-year low in our US$ fixed income model. Investors are now concerned about credit quality for the first time in years. Industrials have just been downgraded to underweight in our US equity sector model, which nearly always indicates that investors are worried about the outlook for the real economy.

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Income in Dollars, Please

Friday, April 17th, 2020

Time to look at European Energy equities

Generating an adequate income from euro-denominated bonds is next to impossible, so investors should abandon the attempt. They should embrace currency risk – not try to hedge it away. They should enjoy the fact that US dollar yields are structurally higher than those in the Eurozone. This means owning long-dated Treasuries and dollar-denominated EM sovereign bonds. Finally, they should consider the source currency of their equity dividends and take another look at the Energy sector.

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Is Energy Un-Investable?

Thursday, November 7th, 2019

Sector at multi-year lows in equity and fixed income models

Nobody likes the Energy sector. On a global basis the current sell-off is as bad as all the other major declines, apart from 2014. The difference is that oil prices are much more stable now than they were then. The medium-term challenges (ESG agenda, electric cars, balance sheet distress) are all well-known, but we would be really surprised if the sector wasn’t rated overweight again within the next two years – any maybe sooner.

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Credit Wobble

Thursday, May 30th, 2019

High Yield weakness is not caused by the Energy sector

High Yield has peaked in our fixed income models and has fallen sharply against Investment Grade. We have checked our cross-asset sector models and it isn’t caused by a problem in Energy. It looks like a straightforward loss of confidence in the outlook for Industrial High Yield. This is potentially ominous for Equities as well, but we haven’t generated a sell signal just yet.

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Straws in the Wind

Wednesday, November 21st, 2018

A time for observation not forecasts

Forecasting with precision all the components of a bear market is very difficult. Observing the increasing number of signals which point in that direction is much easier. These range from US high yield to Eurozone government bonds and US and European equity strategy. It’s not all bad news. There are some positives, such as the potential for a surprise in UK Equities, and a message to buy duration in US Treasuries. However, the overall message from these straws in the wind is very powerful.

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Simple Explanation

Thursday, November 15th, 2018

Industrials are weak in both equity and credit models

Weakness in US Industrials can often be a signal that we are close to a period of market disruption. That signal is flashing yellow, as are the signals from other equity regions such as the UK, the Eurozone and Japan. We have red flags on Industrials across all of our credit models. We don’t have a clear and obvious cause yet, but the simplest explanation could be that we are closer to a significant slowdown than consensus thinks.

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Three Unrelated Ideas

Saturday, July 14th, 2018

Japanese Equities, US High Yield and Healthcare

Our models suggest that investors have decided to use Japanese rather than Eurozone Equities, as a way of funding their increased exposure to US Equities. US High Yield may be about to lose its #1 position in fixed income. Healthcare is about to be upgraded to overweight in the US and Europe. It is largely unaffected by the threat of a trade-war.

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