Fixed Income Roundup: The Rise of Alternative Analyses

As I stated last month, investors have largely left last year’s biggest story, the European Sovereign Debt Crisis, behind. Instead, in the last 30 days, investors have been getting their bearings and putting in place new strategies.

Here are my top fixed-income stories for the past month:

• After the Great Recession, investors are looking for alternatives to include with the more traditional analysis provided by credit ratings agencies. Those alternatives include market-based measures; traditional fundamental analysis; third-party assessments by different institutions; and scenario analysis.
• I have always felt that the gulf between fundamental fixed-income analysis and fundamental equity analysis is largely unnecessary. For this video produced by CFA Institute, John Bowman, CFA, interviewed Northfield’s Dan Bartolomeo about using the insights from equity market analysis to gain an edge in managing bond portfolios.
• On 15 February, the Wall Street Journal carried a piece describing the willingness of European central banks to expand the types of assets they would accept as collateral. In other words, collateral pledges are now allowed to be of lower quality than before. This choice may decrease short-term capital flight risk, but a likely consequence is increased systemic risk throughout the European financial system. Belatedly, the ECB stopped accepting Greek sovereign debt as collateral on 28 February.
• Chinese authorities are clearly making a big push for the renminbi/yuan to become a global reserve currency. Despite the many policy prescriptions, there has been some doubt as to the efficacy of the Chinese efforts. On 15 February, the Financial Times reported that large banks are putting in place safeguards against a sudden collapse of the Hong Kong–centered renminbi/yuan bond market. Counterintuitively, I believe this is a strong sign for the renminbi/yuan bond market. Why? Putting in place safeguards, rather than ending trading altogether, is an acknowledgment of the importance of the burgeoning market. Effectively the discussion has moved from existential issues to technical ones.
• Much bother was created by the European Central Bank’s insistence that the ECB be treated differently than other creditors in Greece’s sovereign debt exchange negotiations. Breaking on 17 February, this story occupied the minds of fixed-income investors for the entirety of the last month.
• Not all Chinese municipalities are the same in terms of credit quality, according to a research report by Standard & Poor’s. Geography is a strong predictor of quality finances, with China’s coastal regions faring better.
• The most recent negotiations between sovereign debt creditors and Greece came to a close on 21 February. Completion of the negotiations, along with a successful debt swap, allows Greece to receive another capital injection to help keep its teetering finances afloat. More recently, the Greek parliament passed legislation that effectively gave them a hammer for dealing with recalcitrant debt holders reluctant to exchange their bonds for new, less-valuable paper. Exchanges of old Greek debt for new Greek debt were signed, sealed, and delivered on 9 March, in a case of same credit, different day.
• European bond markets showed many signs of thawing as liquidity increased in both primary and secondary markets. In particular, Italy, Spain, France, and the Czech Republic were all able to offer debt at prices unthinkable several months ago. Spain’s economic situation is probably most troubling, as its crippling unemployment rate, combined with high private debt levels, make its economic situation potentially untenable.
• In a case of “it’s about time,” mainstream business media has started to track the fact that low interest rates disadvantage many investors, such as insurance companies and pension funds. Consequently, many are increasing the risks in their portfolios in exchange for higher income. A recent Wall Street Journal piece discusses how low interest rates lead to more risk, not less.

For more news and trends, visit the Fixed Income Community of Practice.