Category Archives: Bond markets

5/3/18: S&P upgrade and Russian markets reaction


Belatedly, on the S&P upgrade for Russian Sovereign Debt, here is a good primer from Bloomberg: https://www.bloomberg.com/gadfly/articles/2018-02-23/russia-bonds-are-poised-to-come-off-the-junk-heap.

Markets repricing was quick on the news, when S&P did upgrade country bonds from BB+ to BBB: Russian dollar- and euro-denominated bonds rose across the maturity curve. Russia’s 2043 eurobond was up 1.4 cents to 115 cents in the dollar the day after the upgrade, while 2026 issue was up 0.69 cents to 105 cents, and the 2027 issue was up 0.72 cents to 101 cents. 5 year CDS fell 5 bps to 103 bps.

This was not a watershed, however, as Russian bonds been rallying (with some volatility) for quite some time prior, shaking off completely end of January extension of the U.S. sanctions.

A neat chart via BOFIT shows the improvement in the state of Russian fiscal position:

Russia spent 3 years in 'junk rating' lock up, much of it down to the U.S. and EU sanctions, rather than to any adverse dynamic in Russian sovereign default risks.

As BOFIT noted, "S&P Global Ratings noted that Russia’s macroeconomic policy has allowed the economy to adjust to lower commodity prices and international sanctions. The outlook for the Russian economy is stable. S&P’s rating for Russian sovereign foreign bonds now matches that
of Fitch, while Moody’s continues to apply a junk rating (Ba1). ... The Russian government currently faces no compelling need to borrow from abroad as the current fiscal outlook is rather good thanks to the rise of oil prices and fiscal discipline."

In 2017, Russia witnessed an 18 percent rise in Federal revenues, and an 8 percent increase in allocations to the Social Reserve Funds (spending from the funds rose 6 percent).

Russia retains the position, rather rare for any country, to be able to pay off its entire external Government debt from its sovereign reserves.

7/11/17: 800 years of bond markets cycles


An interesting new working Paper from the BofE, titled “Eight centuries of the risk-free rate: bond market reversals from the Venetians to the ‘VaR shock’” (Bank of England, Staff Working Paper No. 686, October 2017) by Paul Schmelzing looks at new data for “the annual risk-free rate in both nominal  nd real terms going back to the 13th century.”

Such a long horizon allows the author to establish and define the existence of the long term “bond bull market”

Specifically, the author shows “that the global risk-free rate in July 2016 reached its lowest nominal level ever recorded. The current bond bull market in US Treasuries which originated in 1981 is currently the third longest on record, and the second most intense.”


And plotting real debt bull markets (shaded):



Finally, the extent of the current bond bull market (since 1981) relative to previous historical bull markets is reflected also in the extent of yield compression (annualized) that has been achieved during each bull market cycle:


While the rest of the paper goes through three specific case studies of bull markets corrections, it is the first section - the one based on historical long-term data series - that poses the starkest evidence of just how exceptional (and thus risk-loaded) the current markets environment is. Looking at historic averages, and potential for historical mean reversion for yields, the current yield on U.S. 10 year paper will have to double, effectively increasing long-term risk exposure to widening fiscal deficits by the tune of 2.5-2.75 percent of GDP. The cost of carrying this level of indebtedness, when yields run 1.5-1.7 times the upper envelope of the potential rate of economic growth is a function of simple arithmetic. Currently, this arithmetic suggests that the U.S. will either have to figure out how to live with above 5% annual deficits and ballooning debt, or how to live within its own means.

14/10/17: Happy Times in the Rational Markets


Two charts, both courtesy of Holger Zschaepitz @Schuldensuehner:



In simple terms, combined value of bond and stock markets is currently at around USD137 trillion or 179% of global GDP. Put slightly differently, that is 263% of global private sector GDP. There is no rational model on Earth that can explain these valuations. 

Since the start of this year, the two markets gained roughly USD15 trillion in value, just as the global economy is now forecast to gain USD3.93 trillion in GDP over the full year 2017. Based on the latest IMF forecasts, the first 9.5 months of stock markets and bonds markets appreciation are equivalent to to total global GDP growth for 2017, 2018, 2019 and a quarter of 2020. That is: nine and a half months of 'no bubbles anywhere' financial growth add up to thirty nine months of real economic activity.

Happy times, all.

30/12/15: Blink by 25bps, chew through billions: U.S. rates ‘normalization’


In a post yesterday, I mentioned USD3 trillion hole in global bonds markets looming on the horizon as the U.S. Fed embarks on its cautious tightening cycle. Now, couple more victims of that fabled 'normalization' that few in the markets expected.

First up, U.S. own bonds:

Source: @Schuldensuehner 

As noted, US 2-year yields are now at 1.09%, their highest level since April 2010 and roughly double January 2015 average. Now, estimated interest on U.S. federal debt in 2015 stood at around USD251 billion for publicly held debt of USD13,124 billion. Now, suppose we slap on another 0.55%-odd on that. That pushes interest payments on publicly held portion of U.S. debt pile to over USD323 billion. Not exactly chop change...

And another casualty of 'normalization' - global profit margins per BCA Research:
"Over the past two decades, the G7 yield curve has been an excellent leading indicator of global margins. Currently, not only are short-term borrowing costs becoming prohibitive, at the margin, but the incentive to raise debt and retire equity to boost EPS is diminishing. This suggests that profit margins have likely peaked for the cycle."

Here's a chart showing both:
Source: BCA Research

Now, absence of margins = absence of capex. And absence of margins = profits growth on scale alone. Both of which mean things are a not likely to be getting easier for global growth.

Now, take BCA conclusion: "Finally, global junk bonds are pointing to a drop in equities in the coming months, if the historical correlation holds. Indeed, we are heeding the bond market’s message, and are concerned about margin trouble and the potential for an EM non-financial corporate sector accident: remain defensively positioned."

In other words, given the leverage take on since the crisis, and given the prospects for organic growth, as well as the simple fact that advanced economies' corporates have been reliant for a good part of decade and a half on emerging markets to find growth opportunities, all this rates 'normalizing' ain't hitting the EMs alone but is bound to under the skin of the U.S. and European corporates too.

Good luck trading on current equity markets valuations for long...