Credit Snapshots from February 2018

Jonathan Rochford

With the increase in the American overnight rate and long term bond yields questions are starting to be asked about whether the federal government debt load is sustainable. As interest rates increase, so does the interest bill. Neither major political party seems to care, they have taken turns at making... Show More

Short Volatility is a Legitimate Investment Strategy

Jonathan Rochford

In the wake of the VIX spike and bust up of roughly a dozen inverse volatility products this month, there’s been plenty of people criticising short volatility strategies. Harvard has been singled out as it was one of the largest holders of XIV, an exchange traded note that has been... Show More

Thanks Michael - you are right, this isn't a new issue. Complexity is a killer with cash investments. I think this issue is popping up again as super funds are increasingly taking management of cash and vanilla debt in-house, perhaps without the expertise that is assumed.

On What is “Cash” and Why it Matters -

Hi Mr T. Last cycle Aussie hybrids say their prices drop 30-40%, peak to trough, so that should be a starting assumption for buyers today of what can happen. In Europe several banks have zeroed their hybrids so there is certainly precedent for this to happen. Difficult to say whether that will happen here in the future, but easy to say that there is better value elsewhere in the Aussie debt markets. Some of the new issue Aussie high yield bonds are turnaround stories that need to "grow into" their debt loads. It is inevitable that some will not perform. Some Aussie infrastructure debt is about as risky as it was before the crisis, and there was a good batch of defaults last time from Babcocks, Allco, toll roads and others. Be wary of assets dependent upon Chinese demand for commodities, whether that be mines, mining services or ports.

On The Dirty Dozen Sectors of Global Debt -

Thank for reading and commenting Emanuel. We are just starting to see a weakening of the long held position that student loans remain after bankruptcy. See this WSJ article for instance. https://www.wsj.com/articles/judges-wouldnt-consider-forgiving-crippling-student-loans-until-now-1528974001 Student loans are typically wiped after 20-25 years of qualifying payments. One way or another, US taxpayers are going to see a lot of this "asset" go uncollected.

On The Dirty Dozen Sectors of Global Debt -

Thanks James. Europe, Asia and Emerging Markets have all seen a decline in lending standards since 2009. Cov lite lending in Europe is not far behind the US. In Asia, many markets remain overbanked and China continues to be on a borrowing and malinvestment binge. Venezuela, Argentina and Turkey are EMs in tricky situations.

On The downturn in high yield will be big, long and ugly -

Thanks Ron, it is late stage for credit globally and a time to be careful with all asset classes. If credit markets do suffer a downturn, highly leveraged equities will follow soon after. Centro, Allco, Babcock and Brown, Rams are some examples from last time.

On The downturn in high yield will be big, long and ugly -

Thank you all for the comments. I share the sentiment that politicians are not acting in the interests of all Australians and are not spending our taxes efficiently.

On The Economics of Population Growth -