Blain's Morning Porridge - The Joy of Bond Indices...

Mint – Blain’s Morning Porridge Feb 2nd 2017

“Hammersmith Palais, the Bolshoi Ballet, Jump back in the alley, add Nanny Goats….”

And it’s a late start to my daily market missive this morning – but rather than jumping straight in to my daily rip-off of other blogs and the financial media spiced with pithy observations from my colleagues, I’ve spent some quality time with my Bloomberg. Nice. My chief macro economist, Martin Malone, and I have been delving into the bowels of the new Bloomberg IN Function: {IN <go>} .

It’s always well worth spending time grubbing around global bond indices – to get an idea of where the action is and isn’t. Now I know bond indices are as about as exciting as a slap with a wet halibut to anyone in the equity markets or without the bond-gene in their DNA sequence.. but within the bond markets lies the future.

Bond markets never lie.. although they quite often mislead and provide dangerous guidance.. (Just like the Delphic Oracle when she told King Croesus his war would lead to the fall of a mighty empire. It did. His own.)

The Bloomberg bond indices cover over 21,000 bonds, which returned 0.83% in Jan.

Immediately a couple of issues I think are interesting arose:

Venezuela US$ bonds were the best performer – up 5.59% in Jan, Brazil up 3.34%, but Mexico only rose a middling 0.48%. Wonder why?...

Looking at the US high yield market, I’ve been taking the commonly held view the proposed Trump tax changes spell trouble for the hi-yield and will be great for corporate bonds. If bonds are no longer tax-deductible, barely profitable cash flow strapped companies aren’t going to benefit from lower corporate taxes, and will suffer from the loss of tax deductibility. Hence, the deeper down the hi-yield market you dive, the less attractive CCC issuers should be.

And for high grade corporate bonds, the cut in taxes will increase profits while the loss of deductibility will restrict issuance – which together are money positive and should reduce supply, pushing prices higher!

Yet the indices show the best performing part of the hi-yield market in Jan was the CCC hi-yield sector – which is up 2.50% over the month ! That’s the very area where I’d expect some pain? Why that I wonder? The Trump Jump?

And the US corporate bond market – nearly 6000 investment grade bonds in the indices – returned 0.31% in the same period.

I also took a quick glance at Sterling, where the New Year continues to beat up players. Long end gilts have taken a spanking, returning -2.7%. The best performing part of the sterling market has been linkers – up 1.82% in Jan. Again, something for Mr Carney to consider at today’s likely lacklustre BOE meeting when he talks inflation and prospects..

I am off to have some more fun with IN… what other fun stuff will I find…

I suppose I ought to mention the non-event of last night’s Fed FOMC – nothing of note excepts a grudging acceptance “consumer and business sentiment has improved of late”, they said. That’s what happens when the new president has been promising Jam Today and Jam Tomorrow! For the more serious Fed Watchers among us – nothing on what the Fed will do to “unwind” its $4.5 bln balance sheet. The indices tell us Fed Watchers still only expect one modest Fed hike in 2017!

Meanwhile to add to the sheer misery that is February.. my stock picking guru Steve Previs (who suffers from the incurable condition of being an American) has just reminded me its Groundhog Day. Great film.

Otherwise pointless.

Bill Blain

Head of Capital Markets / Alternative Assets