Bond Vigilantes - gordonharding

M&G inflation linked corporate bond funds update

Tue, 07 Sep 2010 08:49:00 GMT

Yesterday Jim blogged that M&G was launching two new innovative corporate bond funds - the M&G UK Inflation Linked Corporate Bond Fund and the M&G European Inflation Linked Corporate Bond Fund. For those that are interested in hearing further details about the funds straight from the horse's mouth, click here for a short video interview Jim did yesterday with Charlie Parker from Citywire.

Gilt supply update: back to a world of issuance exceeding buybacks

Tue, 15 Dec 2009 15:08:00 GMT

In last week's Pre-Budget report, UK Chancellor Alistair Darling announced that gilt issuance for the current financial year would total £225.1bn - a shocking and record figure, although not far off the £220bn that was originally planned in this year's Budget. But while on one side we've had this huge volume of supply from the DMO, we've also had the unusual situation of the BoE busily mopping up gilts at a frantic pace. In fact as this chart shows, in Q2 and Q3 of this year, the BoE was actually buying gilts back faster than the DMO could issue them. This massive demand for gilts has kept a lid on gilt yields - 10 year gilt yields today are where they were at the beginning of June.

However, the demand/supply dynamic is changing and is set to change further. Looking at demand, the pace of buybacks has recently slowed considerably, as pointed out by Richard here. In November, the BoE 'only' increased the scale of QE by £25bn versus a £50bn increase previously, and year to date gilt issuance has once again overtaken the volume of BoE buybacks. In terms of supply, we still have around £50bn of mainly conventional gilt issuance to come over the remainder of this financial year, followed by another £174bn in the pipeline for 2010/11 and probably a similar amount the following year.

The quantitative easing pressure cooker has clearly kept gilt yields lower than they would have been in its absence, but the worry is what will happen once the lid is eventually taken off. Who's going to buy the gilts? Will the gilt market bubble over and make a big mess?

You shouldn't underestimate the power of the authorities to find new ways of generating domestic demand to keep sovereign debt yields yields suppressed, as the Japanese experience of the past decade has shown, and in the UK we'll see that a significant part of next year's gilt supply will find its way onto banks' balance sheets. But in our view there's a greater risk that gilt yields will rise from here rather than fall, and the prospect of a hung parliament and the potential for a UK credit rating downgrade increase the risks.

Deflation is spreading

Fri, 21 Aug 2009 13:16:00 GMT

Back in April, Mike wrote about the US entering deflation for the first time in half a century, noting a number of other countries that were also in deflation (see here). Since then, we've seen several more follow - the list now reads Ireland, Thailand, Malaysia, Taiwan, US, Japan, China, Belgium, Portugal, Hong Kong, Spain, Switzerland, Morocco, Canada, Sweden, Cyprus, France, Estonia, Finland, Slovenia, Germany, Singapore and Austria (in fact the Eurozone as a whole is in deflation).

The accompanying chart shows the latest CPI inflation rates in a selection of countries, along with the rate for the same time last year. It's clear just how large some of the downward movements in CPI have been. This is partly due to base effects, such as the decline in oil prices from last summer's highs, but also because of the amount of spare capacity that has been created in the global economy as a result of huge falls in economic output. 'Highlights' from the chart include Ireland, where prices are falling at nearly 6 percent a year (perhaps we may soon see the Northern Irish heading south to shop instead of the other way around), and France and Germany, which are in deflation despite recently printing positive Q2 GDP numbers.

It's also interesting to note that US CPI is lower than Japanese CPI.

Bradford & Bingley skip bond coupons - is this legal?

Thu, 28 May 2009 15:08:00 GMT

We've had a question from a reader of this blog about yesterday's announcement that Bradford & Bingley will be skipping coupon payments on some of its bonds and whether this constitutes an event of default.

Actually it doesn't, and why not? Well, because HMT says so...

Back in February the government made changes to the terms of its nationalisation of B&B, using power it gave itself under the new Banking Act. HMT amended the Transfer Order through which B&B was nationalised to explicitly allow non-payment of coupons on B&B's Lower Tier 2 (LT2) dated subordinated debt, and to rank it pari passu with preference shares in liquidation.

This meant that from that day onwards B&B LT2 instruments had NO event of default (neither coupon non-payment nor non-repayment of principal count as events of default), making them effectively Upper Tier 2 (UT2) instruments in every way (it was always the case that banks could defer interest payments on UT2 debt in certain cases), except that they now expressly ranked pari passu with preference shares in liquidation.

B&B had already said it would only make payments until the end of May, and after that would submit a restructuring plan that was unlikely to see any payments being made to subordinated debt holders. So yesterday's announcement that it won't be paying coupons on three of its Tier 2 securities (one lower T2 and two UT2 bonds with a nominal value of around £325m), which have coupon dates in July, came as no surprise.

The only continuing confusion is whether this triggers an event of default on subordinated bond Credit Default Swap (CDS) contracts, and if so, whether this credit event would also apply to the senior CDS as well. Trader speculation is rife, with varying interpretations, but no clarity yet from the trade body ISDA. The CDS market remains an immature one, and stressed events like this nationalisation show that participants need to be very cautious about the protections that they think they've bought or sold.