Investors scramble for riskiest ABS bonds in rush for yield

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Investors scrambled for the
riskiest tranches in one of the busiest weeks in the
asset-backed bond market when over US$9bn was raised by deals
that pooled everything from subprime auto and consumer loans to
shipping container leases.

The scramble for yield and diversity was clear: some of the
most subordinated bonds were multiple times covered, esoteric
trades were upsized and some issuers locked in their lowest
spreads yet.

“The subscription levels on subordinated tranches is
definitely very noteworthy,” Jay Steiner, co-head of US ABS at
Deutsche Bank, told IFR.

 

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State and local pension plans have shifted towards ‘alternative investments’

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My colleagues — J.P. Aubry and Anqi Chen — and I are completing a study on the impact of changes in the investment portfolios of state and local pension plans.

Since the financial crisis, public pension plans — like other large institutional investors — have moved a significant portion of their portfolios into investments outside of traditional equities, bonds, and cash. These alternative investments include a diverse assortment of assets, such as private equity, hedge funds, real estate, and commodities. Between 2005 and 2015, the allocation to alternatives more than doubled (from 9% to 24%) (see below). This shift reflects a search for greater yields than expected from traditional stocks and bonds, an effort to hedge other investment risks, and a desire to diversify the investment portfolio.

 

Read more on Market Watch

State and local pension plans have shifted towards ‘alternative investments’

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My colleagues — J.P. Aubry and Anqi Chen — and I are completing a study on the impact of changes in the investment portfolios of state and local pension plans.

Since the financial crisis, public pension plans — like other large institutional investors — have moved a significant portion of their portfolios into investments outside of traditional equities, bonds, and cash. These alternative investments include a diverse assortment of assets, such as private equity, hedge funds, real estate, and commodities. Between 2005 and 2015, the allocation to alternatives more than doubled (from 9% to 24%) (see below). This shift reflects a search for greater yields than expected from traditional stocks and bonds, an effort to hedge other investment risks, and a desire to diversify the investment portfolio

Read more on Market Watch

Record number of CFA U.K. members think corporate bonds are overvalued

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The proportion of the CFA Society of the U.K. members who view corporate bonds as overvalued is at a record high, show the society’s valuations index.

The index, which polls the society’s members, found 84% of respondents think the asset class is overvalued. This belief has climbed over five consecutive quarters. The previous quarter, 82% said they believed corporate bonds were overvalued.

In a news release accompanying the data, CFA U.K. said the increase in the proportion of members holding this view “most likely reflects the slight drop in corporate bond yields” since the previous quarter, to 1.56% as of April 20, from 1.66% as of Feb. 8.

 

Read more on Pensions & Investments 

Is this ‘guaranteed’ bond really certain to pay you 5pc interest for almost 10 years?

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If you are an income-starved investor, could you say no to a “5pc guaranteed sterling bond”? I suspect many would find the combination of annual interest of 5pc and a guarantee highly attractive.

This is what is on offer from a firm called Burford Capital, which makes its money by financing legal cases.

But if you take up the offer, are you really guaranteed to receive 5pc interest for the term of the bond, which is nine-and-a-half years?

The short answer is no.

The supposedly guaranteed bonds are simply “retail bonds” issued by Burford. Just like any company that issues corporate bonds, if it goes bust the bondholders stand to lose all of the interest and capital they were due.

 

Read more on Telegraph

Why are most corporate bonds still traded on the phone?

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Manual trading has all but disappeared in much of finance. Most stock exchanges no longer have shouting floor traders; anyone from retail investors to the largest asset managers can buy and sell shares through easy, automated, electronic systems. The derivatives markets are even further along: for some types, nine-tenths of volume is traded electronically. Yet more than 80% of corporate bonds trading still happens over the phone. Why does buying into the corporate bond market, a $50trn market globally, with $1.5trn in issuance last year in America alone, still require calling up a trading desk most of the time?

The corporate bond market has certain unique characteristics that make it different. A firm typically issues at most two types of shares (common and preferred), but may have dozens of bonds outstanding that differ by maturity, issue date and the degree of seniority in the firm’s capital structure. Given the dizzying variety of bonds, any individual one is traded only rarely. In fact, 90% of corporate bonds trade fewer than five times a year.

The traditional way to overcome this illiquidity has been through trading desks at investment banks, who act as market-makers. They name their price, buy up bonds from interested sellers, and hold them as inventory on their balance-sheet until a buyer comes along. This dealer-based system, relying on personal relationships, has remained unchanged for several decades; the phone calls have therefore persisted as well. Indeed, looking just at phone trades understates the continuing importance of dealers. Even of the 20% of trading that is electronic, nearly all takes place on so-called “request-for-quote” platforms where dealers are still the only ones with the right to quote prices, and to buy or sell.

read the full article on The Economist

The Bank of England and the Bond Market

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When the BoE’s monetary policy committee sits down to discuss the economy, it does so in the knowledge that the bond market does not think it is doing its job properly. Dan McCrum says if inflation hawks reveal themselves, markets may have to reassess.

UK inflation was steady in March, according to data released Tuesday, ticking along at what is the fastest pace in more than three years, as the effect of a weaker pound feeds through into import prices, all as might be expected. But when the bank of England’s monetary policy committee sits down next month to discuss the economy, its members will do so in the knowledge that the bond market doesn’t think that they are doing their job properly. Investors can trade bonds and financial contracts tied to the level of inflation. And over the next decade, the so-called breakeven rate for retail price inflation is 3.5%. The figure is also pretty similar for breakevens ranging from five to 30 years time. For such bets to pay off, inflation needs to be on average higher than the breakeven rate. The measure of inflation used here, which includes housing costs, tends to be around a percentage point higher than the consumer price variety policymakers target. Even so the implication is inflation will be seriously higher than 2% all the way to 2027. That’s going to require a series of letters to the treasury explaining why the target is being missed. Now look at market prices another way. And the inflation adjusted all real 10-year interest rate for the UK economy is minus 2.4%. That’s the lowest it’s been in, at least, 25 years. At a moment when the country is approaching full employment, an inflationary pressure from import prices is rising. Monetary policy is extremely stimulative. What is strange, however, is that many investors and strategists say that they share the view of policymakers, that import inflation will prove temporary. So we should look through it.

 

…read more on Financial Times

First Retail Bond for care sector raises £33m in under a week

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The first Retail Charity Bond to be issued for the care sector has closed after less than a week, having raised £33 million.

The bond, for Greensleeves Care, pays an interest rate of 4.25% a year for a term of nine years, and saw strong demand from a range of institutional, ethical and individual investors.

The bond will be issued through Allia’s Retail Charity Bond platform. According to Allia, it is the largest Retail Charity Bond and the lowest interest rate to date. It brings the total raised through the platform to £91million, following previous issues for Golden Lane Housing (£11m), Hightown Housing Association (£27m) and Charities Aid Foundation (£20m).

 

Read more on fundraising

Will it be a happy new year for your investment funds?

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Stock market investors have seen bumper returns, with the FTSE 100 soaring after the Brexit vote. We ask some of the biggest names in the business for their 2017 predictions.

The FTSE 100 index of Britain’s biggest stock market-listed companies has enjoyed its strongest year since 2009, jumping from 6,137 at the start of the year to touch nearly 7,000 this week. Wall Street’s S&P 500 has hit record highs, with British investors gaining even more in sterling terms because of the fall in the currency. This has meant that some of the biggest funds popular with small investors – such as M&G’s £6.3bn Global Dividend – have made gains of nearly 40% over the past year.

But not everyone has shared in the party. The single biggest fund in the UK, Standard Life’s £26.3bn Global Absolute Return Strategies, has managed to lose money when almost everyone else has been coining it. The fund is down 3.3% over the past 12 months, compared with the 17% gain made by UK index-tracking funds over the same period.

Star fund manager Neil Woodford has also had a poor year, making just 2.7% over the past 12 months for investors in his popular £9.2bn equity income fund.

The prize for the best performance of any fund in the UK goes to the little-known JFM Gold, which has given investors a return of 128% over the past year. Unfortunately, it’s only a £20m minnow, so we took a look at the big funds instead. M&G Global Dividend performed best, rising 39.4%, while Fundsmith Equity was up 28.2%. Both are heavily invested in Wall Street-listed stocks, which have rocketed in sterling terms. For example, Microsoft (a big holding in both funds) was trading at $54.80 at the start of the year and was $63.14 this week – a rise of 15%. But in sterling terms that translated into £37.27 at the beginning of the year, and £49 now – a rise of 31%. While the post-Brexit plunge in sterling will make holidays more expensive for everyone in 2017, it has turbo-charged returns for pension and Isa holders with investments in big US companies.

Billionaire Brexiter and hedge fund manager Crispin Odey reportedly made millions around the referendum, but investors who put money into his Odey Absolute Return fund won’t be smiling. It was the second worst performing fund of the year, losing 15.7% and beaten to the bottom only by an absolute return fund from Argonaut Partners. These hedge fund-style investments became popular a decade ago, but in 2016 almost everything with the words “absolute return” in their name turned into absolute rubbish. Sadly, we can assume their managers will still receive giant pay packets for their sterling performance.

So what will be the winning formula for 2017? We polled some of the leading managers and here’s what they think:

Stephanie Flanders, chief market strategist, UK and Europe, JP Morgan Asset Management

The former BBC economics correspondent reckons Donald Trump’s spending will boost the US economy in the near term, but US shares look fully priced, and Westminster has cloth ears about the Brexit issues facing London banks.

“Politics and policy are likely to dominate the headlines again in 2017. Voters have decided against business as usual and, increasingly, investors are also expecting a change. Whether either will be satisfied remains to be seen.

“The eurozone and Japan have come to the conclusion that when it comes to pushing down long-term interest rates, you can have too much of a good thing. So investors should not expect capital gains on bond holdings to compensate for low interest rates as they have in the past. People have been predicting a turn in the bond market for several years, only to see bond prices reach new highs. But in the past few years, inflation was heading down, not up. This time it really does look different.

 

Corporate debt returns lure investors back to bond market

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The global bond market rout triggered by Donald Trump’s US election victory looks overdone, according to bond investors now betting that the sell-off was too violent and that borrowing costs will remain contained into the start of the new year.

Mr Trump is expected to unveil a large, inflation-fuelling economic stimulus package of infrastructure spending and tax cuts, which has stoked fears of an end to the three-decade bull market in bonds. The global fixed income market lost more than $1.8tn of value over the past two weeks, sending yields — which move inversely to prices — to a nine-month high on Friday.

But some big investors are betting that the bond turmoil has been excessive, and are dipping back into the market, especially in areas such as US corporate debt, which now offers more attractive returns.

“There’s a greater chance of higher rates than before, but the fundamental backdrop — much greater global demand for dollar fixed income than supply — means they will stay low,” said Tod Nasser, chief investment officer of Pacific Life, an insurer. He is ramping up purchases of US corporate bonds in particular. “We want to be a bit more aggressive now,” he said.

The yield on 10-year Treasuries, one of the most closely followed rates, has climbed from 1.77 per cent ahead of the US presidential election to 2.35 per cent on Friday, the highest level since last December. That move has reverberated across debt markets, but many analysts and fund managers have pointed out that the details — and practicality — of many of Mr Trump’s plans remain unclear.

 

Read more on Financial Times