Running hot

The thermometers are popping all over the country, so our mad head of fixed income decides to do a marathon. Bryn Jones takes action on climate change and assesses the US.

I chose a good day to get back into proper long-distance running. A little too good. Thirty degrees down in the southeast and I’m taking a water break in a church by the trail, praying for cloud cover. Maybe if I went to church a little more often he would have listened to me …

It was punishing out there. A 28-mile up and down trail circumnavigating Tunbridge Wells, bounding over more than a hundred stiles. It’s a great route though – one set up this year on Fastest Known Time, a crazy trail-runner’s bible. And many of you will know, I’m a crazy trail-runner. My training has been on furlough for a while, though, due to injury. So it was great to get back out there, even if it was unbearably hot.

"I guess that’s why I’m a bond manager. It’s a wonderful, scorching summer’s day and I’m out there running up hills praying for clouds and rain."

Still, there were plenty of places in the world that were hotter. Worryingly, one of those was a Siberian Arctic town that got to 38 degrees. The area does have the largest natural swings in temperature, yet the current heatwave is concerning scientists. Half of the Arctic Sea ice sheet has melted away in the past 40 years and worsening wildfires are aggravating the situation. We really need to speed up our move from carbon-intensive power to cleaner alternatives.

My Ethical Bond Fund has never invested in oil and gas companies, for obvious reasons. Yet we have invested in many large financial companies, most of which make loans to fossil fuel businesses. It’s hard to avoid this second-hand carbon exposure in financial giants – so much of our world is still powered by fossil fuels that it’s impossible for lenders of any size to avoid financing such projects. However, we are trying to make a difference, and we believe our fund is large enough to make a certain stand here. We have been selling down bonds that we hold in banks that make an outsized proportion of their loans to oil and gas businesses. Meanwhile, we continue to finance many renewable energy projects, particularly wind farms, through our investments.

Things are hotting up over in the US, too. Simmering trade tensions between the US and China are looking like catching fire at any point. If that happens, financial markets could well take a tumble. Several American states are struggling to contain COVID-19, putting a quickened recovery in question. Adding foreign difficulties to the mix would not help matters. These risks don’t quite feel like they’ve been incorporated into share prices (to me at least). Yet you can see them subtly feeding into interest rate and currency markets and therefore bond markets. Every time these risks flare-up, you can see US Treasury yield curves flatten (longer-maturity bond yields fall closer to the yield offered for shorter-term bonds) and safe haven currencies like the dollar rally.

“Half of the Arctic Sea ice sheet has melted away in the past 40 years and worsening wildfires are aggravating the situation. We really need to speed up our move from carbon-intensive power to cleaner alternatives.”

Whereas equity markets tend to be thought of as generally optimistic, happy-go-lucky sort of places, fixed income markets are often talked about as the boring, grouchy, pessimistic brother. There’s a reason for that. Because share prices have no ceiling, it makes you look at the upside – how much money can I make? As for bonds, they can only return the amount of cash you agreed on (the coupons and the return of your capital) which tends to focus your mind on the downside – how much money could I lose?

For the moment though, central banks are taking no chances, keeping markets as liquid as possible and extending emergency loans to help tide companies over during the pandemic. There’s an anticipation that if the US comes unstuck as it relaxes its lockdown, the US Federal Reserve will simply roll out yet more thirst-quenching stimulus. Indicators of stress in financial markets have cooled off and, the market is feeling, overall, pretty benign.

I guess that’s why I’m a bond manager. It’s a wonderful, scorching summer’s day and I’m out there running up hills praying for clouds and rain.

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