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Posts from the ‘Fixed Income’ Category

Mar 28

Warrick Tim

The Great Debate on the Great Rotation: The Fixed Income Perspective

There have been many classic debates in popular culture over the years.  In technology we’ve had PCs versus Mac, and then Droid versus iPhone.  In beverages, we’ve had Coke versus Pepsi, while in entertainment we’ve suffered through Team Edward versus Team Jacob.  And baseball will always have the Red Sox versus the Yankees.  Even in investments, we have had our own ongoing version of a great debate, which has been simmering for a few years, yet this one involves asset allocation and is much more meaningful and significant:  will there be a “great rotation” out of corporate bonds into equities?  Read more

Mar 19

seema shah's picture
1 Comment

European Haircuts – The Latest Styles from Cyprus and Greece

According to GQ, the hottest haircut trends for 2013 are things like the slick comb over, the short crop, the medium and messy, and the long and parted. Cyprus and Greece have been going a different path; pioneering haircuts that have investors around the world feeling jittery. And by “haircut,” I mean “writedown,” or “loss.” On Saturday, the tiny island nation of Cyprus announced it would raise about €5.8 billion by taxing bank deposits – including individual deposits with only small account balances. This proposal is a means of easing the pain of a bailout agreement. The announcement, which hasn’t stated specific thresholds or percentages, sent a shudder of panic through Cypriots and the wider investment community. Originally, the plan called for a 6.75% tax on amounts less than €100,000, and 9.9% on amounts over €100,000. That means if you had €1,000 in your bank account, after the tax, you’d miraculously lose €67.50.  The problem with all of this for investors is not the scope for financial contagion to other periphery markets; the Cypriot economy is relatively small – somewhere around US$25 billion, according to the IMF. No, what has investors spooked is the implication of the bank-deposit haircut. Read more

Feb 26

seema shah's picture

Moody’s Downgrades the UK: Keep Calm and Carry On

If you want Aaa-rated government debt, you’ll have to go looking to Canada, or Australia, or Germany, because late last week, ratings agency Moody’s officially downgraded the United Kingdom’s government bond rating from Aaa (their highest level) to Aa1 (their second highest level). Moody’s downgrade was based on three factors: the UK’s weak medium-term growth outlook; the impact of the weak economic outlook on the government’s fiscal consolidation plan; and the high and rising public debt burden. On the last point, Moody’s expects debt to peak at over 96% of GDP in 2016.

The downgrade wasn’t really a surprise, but it did come earlier than expected. The Office of Budget Responsibility had projected that government debt would remain over 90% of GDP for at least six years – that’s inconsistent with a triple-A rating. However, the downgrade came before the official budget was announced on March 20, which is when most figured the nudge downward would have come. Read more

Jan 24

seema shah's picture

The OMT and Europe’s Five Options – Actually, Only Two – For Addressing Their Debt Problems

Last September, you may recall, the European Central Bank (ECB) announced their new bond-purchase plan, Outright Monetary Transactions, or OMT. What’s interesting is that the OMT hasn’t purchased a single bond, and yet Spanish and Italian bond yields have fallen a few hundred basis points since then, making the debt burdens in those countries a bit more sustainable. So besides the power of its name, how did the OMT turn things around? Read more

Dec 6

seema shah's picture

The Great and Powerful Oz: How Long Can Things Go Up in the Land Down Under?

Having just returned from a two-week tour of Eastern Australia, I can confidently tell you that the Land of Oz is blessed with many great things: sunshine (a novelty for a Londoner like me), beaches, vineyards, and great food. But these blessings all come at a very high price. Everything – from food to clothes – seemed mighty expensive. And coming from a Londoner that’s saying something!

The very sharp appreciation in the Australian dollar goes some way to explaining the tremendous rise in prices. In the span of four years, the Australian dollar has strengthened from US$0.63 to US$1.05. All else being equal, that implies a virtual doubling of prices! So whereas a pizza in Australia may have cost around US$15 in 2009, it now goes for around US$25.

The incredibly powerful performance of the Australian economy over the past few years has contributed to this sharp strengthening of the Aussie dollar; meanwhile, the European and U.S. economies have been redefining the term “tepid recovery.” Read more

Nov 28

seema shah's picture

The Old Lady of Threadneedle Street Has a New Man…and He’s Canadian

On Monday, the Old Lady of Threadneedle Street proved that she’s still got some tricks up her sleeve. The Bank of England (located on Threadneedle Street in London since 1734 – hence the name) shocked almost everyone by announcing that Mark J. Carney had been selected as Mervyn King’s successor as governor of England’s central bank. I say “shocked” because Carney wasn’t exactly the odds-on favorite for the job…and he’s not a British citizen. You see, Carney’s Canadian…in fact, he’s currently the head of the Central Bank of Canada. The man almost everyone thought would be the next governor of the BoE was Paul Tucker, who is currently the deputy governor at the BoE. He’s been at the BoE since 1980, so it’s not too much to say that practically everyone concerned considered him a shoe-in for the job.

This marks the first time in history that a non-UK citizen has been appointed as governor of the BoE, though there have been several U.S. economists who served on the Monetary Policy Committee in recent years. Yet of all the countries the United Kingdom could poach a central bank head from, at least Canada still has Queen Elizabeth II on the C$20 note.

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Nov 5

seema shah's picture

Pluck of the Irish – A Comeback Story in the Making?

It used to be that Ireland had a bit of an image problem, perhaps not with the rest of the world, but with itself. Irish playwright George Bernard Shaw said, “I showed my appreciation of my native land in the usual Irish way by getting out of it as soon as I possibly could.” For much of the 19th century, following the Great Famine, socioeconomic conditions were such that a culture of emigration took hold in Ireland and its citizenry left in droves for England, the United States, Australia, and Canada. By some measures, this lasted right up into the 20th century, until the Celtic Tiger (a catchy name coined by a Morgan Stanley economist) economy sprang forth and Ireland’s prospects started to look positively dazzling. A number of factors including low corporate taxes, infrastructure upgrades, and education improvement drew businesses (particularly tech companies) to the Emerald Isle.

The new prosperity not only made things better for the average Irish citizen, but even started attracting immigrants from abroad. Incomes rose, unemployment fell…and then in 2001, this economic expansion started to reverse and it appeared that the Celtic Tiger had been declawed. After a bit of a rebound, the global financial crisis struck in 2008 and this cat appeared to have used one more of its nine lives.

However…after some time to lick its wounds, the Tiger is potentially gaining strength. Several factors are combining to make Ireland an attractive investment in my opinion. While Ireland still has a way to go in its recovery, there are several fundamental factors that point toward renewed prosperity.

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