Remember the commercials featuring Sonny the Cuckoo Bird going absolutely nuts and repeating the phrase, “I’m cuckoo for Cocoa Puffs!” after eating a spoonful of the chocolaty goodness? In some sense, that’s been investors’ behavior for any investment offering yield in today’s low-yielding market. To give you a high-level illustration of why investors are yield starved – the yield on the 10-year U.S. Treasury in 1963 (the year Sonny first appeared in Cocoa Puffs commercials) ranged between 3.80% and 4.15%, while today the yield is only around 2.60%. This shift is making it challenging for fixed income-focused investors (retirees, pension funds, and insurance companies) to achieve their desired yields. As a result, they are moving out the risk spectrum into riskier credits or down the capital structure into higher-quality credits. Interestingly enough, that brings us to an exciting new opportunity – CoCos. Read more
Posts from the ‘Institutional Investor’ Category
Even after a bumper year of investor inflows, high yield bank loans underperformed high yield bonds in 2013. Flows into bank loans, a segment of the overall high yield fixed income market, were north of US$62 billion, and yet the total returns in the high yield bond market were better. Why didn’t all that love from investors translate into better returns? Read more
Last week, ratings agency Moody’s finally did the right thing and upgraded Ireland’s sovereign debt rating from Baa3 to Ba1; that’s back up to investment grade and in line with the ratings from Fitch and S&P. Moody’s had been the only rating agency to originally decide that Ireland was junk status – Ireland’s strong economic outlook and hard work on fiscal reforms had convinced Fitch and S&P to ignore that it had lost market access and those ratings agencies have continued to deem it a decent investment prospect through the last few difficult years. Read more
Bonds generally have an asymmetric risk profile, meaning they have more downside risk than upside potential. For example, if you invest $100, your possible return may be 5%, or $5. However if a borrower is unable to pay their debt, an investor could lose 100% of their investment, or $100. To help protect against this asymmetry, nearly all corporate bond issuances include covenants. Simply put, a covenant is a contractual agreement or requirement for the borrower that protects the buyer of the bond. Covenants can be ‘affirmative’ (i.e., actions that the borrower is required to do), or they can be ‘negative’ (i.e., specifying what the borrower is prohibited from doing). Not all covenant packages are created equal, however, and that is a key difference an investor must be aware of when comparing public debt versus private debt. Read more
Do you find yourself waking every morning, expecting to read about another U.S. recession? Do the words “economic recovery” leave you feeling anxious and apprehensive? Do you find that you prefer The Rolling Stones’ “Paint It Black” to “Oh Baby (We Got a Good Thing Going),”or The Beatles’ “The End” to “Getting Better”? Do you find yourself eschewing upbeat-sounding TV shows like Happy Days and Good Times in favor of darker-sounding fare like Breaking Bad, Lost, and House of Cards?
If you answered ‘yes’ to any or all of these questions (OK…maybe the last one is asking too much), you may be suffering from PCRD, or Post Crisis Relapse Disorder. PCRD is a U.S. economic mental affliction that many investors have developed since the financial crisis. It leaves the afflicted with a feeling of constant dread that the economy is poised to tumble into recession at any moment. Its symptoms include chronic market pessimism, a failure to recognize fundamental improvement, shriveled spending, vacation aversion, and spare-cash hoarding.
On December 18, 2013 the Federal Open Market Committee (FOMC) announced they’d taper their massive bond-buying program by US$10 billion per month beginning in January 2014. While market participants and analysts had long obsessed over if and when taper would begin, market interest rates had already begun adjusting to the quickly approaching reality of reduced purchases. But have market interest rates substantially adjusted to a new fundamentally driven equilibrium, or will reduced purchases drive interest rates even higher from here?
From September 2011 through April 2013, long-term interest rates were held down by market confidence in the FOMC’s promise to hold the fed funds rate close to zero indefinitely and an open-ended long-term asset-purchase program. Back in May 2013, Fed Chairman Ben Bernanke brought up the idea that long-term asset purchases may not persist forever, which led ten-year U.S. Treasury rates to rise by 130 basis points (1.3%) over a four-month period. Read more