Charlie Munger RIP. And Fed’s Waller Triggers a Bond Rally Charlie Munger RIP. And Fed’s Waller Triggers a Bond Rally

The (wildly) successful issuance of the UBS Additional Tier 1 (AT1) earlier this month has given the green light to the wider European bank AT1 asset class. Following the controversy surrounding the bail-in of Credit Suisse’s AT1s before a full write-down of its equity earlier this year, investors were rightfully spooked. Regardless of the strict legality of the issue – the matter is still being debated in courts – the weekend pronouncements from the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss Parliament, alongside the apparent breach of creditor hierarchy, has led to a meaningful underperformance in the asset class.

There is a strong argument that Asia holds the key to the future of our planet. Despite comprising just 22% of the Earth’s landmass, Asia’s 4.8 billion inhabitants account for 59% of the world’s population. While it is at the forefront of public consciousness for environmental reasons, with India and China in particular often associated with high emissions, its population density makes it a flashpoint for social issues too. With 153 people per square kilometre, it is three times more heavily populated than Africa (49)…

As part of the ongoing rise in the popularity of ESG, markets have started paying increased attention to various governance indicators not only for corporates, but also for sovereigns. Many asset managers have already developed their own in-house methodologies with the aim of measuring and eventually limiting their funds’ exposures to the emerging markets (EM) countries perceived as laggards in ESG terms.

Demographic changes are set to have a significant impact on the world economy in the coming decades, as we have discussed on a number of occasions. After a 40 year bull market in bonds with yields trending in one direction, might we see a pivot given the demographic outlay ahead? A discussion for another day, but for now, let’s look at whether all is as it seems on the surface. Last month’s Deutsche Bank report[1] on the market impact of demographic changes to 2030 got me thinking about this a bit more.

Debt is an integral aspect of modern economies and has long been hailed as a catalyst for growth. When wielded judiciously, it stands as a potent tool for economic development, providing the means to finance projects, expand operations, and invest in essential sectors like education, health, and housing. In the right context, debt fuels economic growth, creates jobs, and fosters innovation. Furthermore, during economic downturns, it offers a safety net for individuals and organizations, helping them weather financial storms.

It’s Halloween again and time for the Bond Vigilantes’ yearly round up of the spookiest charts in global finance.
With persistent levels of inflation and increasing signs of weakness in the global economy, 2023 has been a scary year for everyone. Turning our focus to markets, the effect of higher financing costs following central banks’ aggressive tightening of monetary policy has meant we have found no shortage of scary charts either.

Dave Covey is M&G’s Head of Credit Research, and his specialist subject is financial credit. I caught up with him in this podcast, spending 30 minutes talking about the valuation of bank bonds (why are they so wide compared with traditional credit?). We also took a look at the ‘accidents’ in the financial system so far in 2023 (for example the Credit Suisse AT1 blow-up, and Silicon Valley Bank’s collapse). I hope you enjoy listening to it.

We recently held our annual Bond Vigilantes Day, here at our offices in London. With fixed income markets trading at yields many investors may have never seen in their careers, the timing for the event was pretty interesting – although valuations have become even more compelling since (!). You can watch the video presentations from our fixed income team.

Everyone knows that the best way to kill a Zombie is to smash its brain. For Zombie firms, that killer blow is higher interest rates. Zombie firms are essentially companies that exist on borrowed time. They struggle to generate enough profits to cover their debt obligations, yet manage to stay afloat thanks to lenient borrowing conditions. The prolonged period of ultra-low interest rates following the 2008 financial crisis played a significant role in sustaining these firms, allowing them to refinance their debts at favourable terms….

Loathe as I am to give the oxygen of publicity to rival podcasts talking about the bond markets, I can make an exception for those where I am the surprise guest…