A dog’s not just for lockdown

Credit markets have been a crazy place for the past couple of months. But our head of fixed income, Bryn Jones, has got a new friend to keep him (halfway) sane.

17 August 2022

Like many other people, over this lockdown I’ve acquired an animal.

Her name’s Rucksack, because the first time I realised I needed a dachshund in my life was when I saw one gliding down a New York street on a cycling hipster’s back. I don’t know what possessed me to get a puppy now – I’ve already got a complex life to juggle. But housebound as I am, with a broken metatarsal keeping me from the routine endurance running, I guess I needed a rock. So, behold my ultra-low-duration dachshund. The only thing closer to the ground than this little girl’s belly is the gilt yield.

It’s the strangest thing. Since Rucksack has joined the family, the neighbour’s cat has started creeping round the place. Like the credit markets, this cat has been at turns flighty and extremely bolshie. Classic cat; classic credit! At times during the past couple of months trying to trade bonds has been like trying to throw a net over this nameless feline.

Yet in recent days, the cat and I have come to an agreement of sorts. Rucksack doesn’t have much time for my constant babbling about duration and credit and calls and ratings and ‘fallen angels’. She’s much happier wandering round the house and yard. But the cat has taken to slinking up and sitting in a nearby chair, watching and listening intently.

The credit cat is learning. He knows it all now: he’s heard me waffling on about the €30 billion (£26.1bn) of European investment grade bonds that are at risk of falling into high yield (he seems pretty certain that the European Central Bank will extend its quantitative easing programme to purchase any of these ‘fallen angels’ sliding to lower credit ratings); and he’s watched the newswires over my shoulder, screaming about the record $245bn (£194.5bn) of bonds issued by investment grade American firms as they prepare themselves for lockdown economics. The more he sees, the more he seems to relax. Him and the rest of the market. Credit spreads kept grinding tighter this week as investors continued buying. Not just investment grade either, but lots of high yield debt is being scooped up as well as corporate issuance goes through the roof.

One thing I’ve pondered for a couple of weeks now as I’ve zipped around the country lanes on my new bike: for many income investors, bonds are the only game in town right now. As companies hunker down for several months of wretched revenues, dividends have been slashed and cancelled all over the place. As a case in point, oil giant Shell cut its £15bn dividend by two-thirds for the first time since World War II. You can’t do this with bond coupons, so I think it’s pushing scores of investors into credit markets.

I’m dubious that this relative calm in credit markets can continue long, however. At the moment, virtually every central bank in the world is buying bonds to try to keep refinancing costs reasonable as companies tap markets for as much cash as possible to tide them over till some semblance of normality returns. For now, don’t fight the Fed (and all the US central bank’s friends). Yet we’re buying very carefully indeed for our funds. If you buy corporate credit shrewdly, and can hold on through the ups and downs of what is shaping up to be a terrible year, you could enter 2021 with very strong income yields indeed. But it’s not for the faint hearted. Near my home is Kidd’s Hill, also known as The Wall. As I was trying to climb it on the bike the other day, I thought about all the businesses out there that are at risk of going to the wall because of this pandemic. The data is going to get very ugly over the coming months. If you pick wrong it could turn out to be very nasty indeed.

Good thing I’ve got old Rucksack to keep me grounded, my low-duration pooch.

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