Bonds

James Mackintosh

As the market rally falters (perhaps), John Authers and I have a new home on FT Alphaville.

This blog will no longer be updated, but our occasional thoughts and more frequent output will appear at ftalphaville.ft.com. Bookmark it and check back! Read more

James Mackintosh

As the festive season approaches investors will be preparing for the boring but essential job of selling some of their wonderfully-performing US shares to rebalance their portfolios back into underperforming bonds, protecting some of those gains.

The question investors face is whether such diversification will help protect their portfolios in the future. Read more

John Authers

Russell Napier’s Anatomy of the Bear seems to be quite a cult classic among investors.Anatomy of the Bear I regularly see it on portfolio managers’ desks. Meanwhile, his video interviews with the FT in the years since the crisis also seem to have created quite a cult following. This week he completed his fourth interview with us since 1999, and he is sticking to his claim, based on historical experience, that the S&P 500 will need to slide down below 500 once more before this bear market is over (he did say 400 in the book).

How much has his story changed, and how seriously should we take him? This obviously divides opinion. So here are his previous interviews with us, in chronological order. Read more

John Authers

Ben Bernanke can move markets, and sometimes his words are too strong for his own good. That may have been true of his press conference last month, when he announced that he planned to start tapering off QE bond purchases later this year, and end them altogether by next summer. That drove a dramatic rise in Treasury yields, and in the dollar.

For a further classic example, look at the speed with which currency markets responded late on Wednesday and early on Thursday to a speech he made in Massachusetts, and to the minutes from last month’s meeting of the Federal Open Market Committee, published on Wednesday. The euro gained 4.5 cents against the dollar in a matter of minutes, while the pound gained almost 4 cents (or about 2.6 per cent). Read more

John Authers

The fun part of the eurozone crisis, if there is one, is that you never know where to look. After the Cyprus crisis three months ago, the hunt was on for the next small peripheral country that would create a headache. Slovenia was a popular bet. So, among some hedge fund managers, was the Netherlands, where house prices are dropping alarmingly. There was a frisson of concern about Croatia’s accession to the EU. But it turns out that the next country to administer a shock, two years on from its bail-out, is Portugal.

You do not need to be an expert in Portuguese politics to see that the country is in a crisis, or that local markets were shocked by developments. When the foreign minister hands in a resignation hours after the finance minister has done the same thing, over an issue of core economic policy, and the existence of a fragile coalition is called into question, then it is natural that prices will be revised. Read more

James Mackintosh

As the month draws to a close, the old “sell in May” strategy failed miserably for equity investors – except in Japan and emerging markets.

There are a couple of lessons from this May, but first here’s what the major assets did during May, first in local currency then in dollar terms:

Total return month to date local currency

Total return month to date dollars

Since the US is still open, both charts are up to the close of the 30th, for consistency, so not quite the full month; European markets today were down about 1 per cent, and Japan up just over 1 per cent, but the broad patterns remain the same. Read more

James Mackintosh

There’s a lot of excitement now junk bond yields (at least on one index) have dropped below 5 per cent for the first time. What to call them, for one thing. “High yield” no longer seems appropriate, although frankly “junk” was always better, and remains just as good. The fact that they barely ever default any longer, suggesting on its face that they are no longer junk, is yet another problem – as John discusses with Deutsche Bank’s Jim Reid in today’s Note video.

But hold on a minute. It is true yields have plunged. But the following charts show that junk bonds are much shorter dated now than they were, so the drop in yield is not as dramatic as it looks (if you lend someone money for less time, you should expect a lower yield as the loan is less risky). The average duration on the index is at a record-low three and a half years (modified duration is a tad longer, but still a record low).

Junk bond yield and duration

On the other hand, investment-grade bonds (and top-grade junk too) have longer maturities – in the case of investment grade, the longest since 1980 at more than seven years. So the ultra-low yields (just over 2.5 per cent) of these better-quality bonds are even lower when adjusted for the risk of lending money for longer. Chart-fest after the jump. Read more

A suggestion by Dutch finance minister Jeroen Dijsselbloem that the Cyprus deal could mean depositors at troubled banks elsewhere in the eurozone also suffering has pushed banks back into bear territory. James Mackintosh, investment editor, warns of the risk of a vicious downward spiral unless Europe and the European Central Bank can reflate peripheral economies.

James Mackintosh

Cyprus has finally struck a €10bn deal to become the fifth country “rescued” by the rest of the eurozone, after Greece, Ireland, Portugal and a special loan for Spain. Almost a third of the 17 countries in the single currency have now had to be rescued.

Unlike all the other deals, Cyprus gets immediate deflation, through heavy losses for depositors above €100,000 at its two biggest banks, Bank of Cyprus and Laiki. Read more