Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Banks

Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Currencies

China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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Financial

Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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Categorized | Capital Markets

Bond bubble evokes odour of rotting fish


Posted on September 20, 2016

Global financial markets plunged on Friday as results from the UK Brexit referendum showed a near 52-48 percent split for leaving a bloc it joined more than 40 years ago. The pound fell as much as 10 percent against the dollar to levels last seen in 1985, on fears the decision could hit investment in the world's fifth-largest economy, threaten London's role as a global financial capital and usher in months of political uncertainty. World stocks headed for one of the biggest slumps on record, and billions of dollars were wiped off the value of European companies. Britain's big banks took a $130 billion battering, with Lloyds and Barclays falling as much as 30 percent. Traders react to the fast moving Euro results at ETX Capital in the City of London this morning. 24th June 2016.

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In Margin of Safety, Seth Klarman’s cult classic on investing, the hedge fund manager recounts a tale of an unusual mania for sardines that briefly struck California when the fish disappeared from the coast of Monterey.

The shortage sent prices rocketing, and eventually local traders bought and sold sardine tins purely on the confidence that they could quickly flip them to another buyer at a higher price. But one day, a trader decided to treat himself to a sardine meal, and became violently ill. When questioned, the seller had a simple explanation: “You don’t understand. These are not eating sardines, they are trading sardines.”

    For sardines, you can now read bonds. Even after the recent correction, a third of the developed world’s government bond market is still trading at prices that exceed their total coupons and principal, in practice guaranteeing investors a loss if they cannot sell the securities to another buyer for a higher price than they paid.

    All bubbles have some rational underpinning. The current bond market is propped up by $180bn of monthly central bank buying that shows no sign of slowing, as well as negative short-term interest rates in Europe and Japan, a swelling savings glut, and mounting concerns over the health of the global economy.

    And there are other reasons why one would buy bonds that yield less than zero, aside from avoiding negative rates or a plan to flip them to the local central bank. Bonds are the bedrock of the financial system for both commercial and regulatory reasons.

    Many transactions require some safe collateral, and financial institutions are compelled to hold a big chunk of their money in bonds. Factors including the price of currency swaps can also make buying a negative-yielding overseas bond economical.

    But the sense that we have lost track of the fundamental point of bonds — providing fixed income, not fixed losses — is inescapable. The US Federal Reserve is unlikely to metaphorically force traders to “eat the sardines” — using Mr Klarman’s phrase — by raising interest rates later this week. But at some point, we will all wake up and smell the rotting fish.

    robin.wigglesworth@ft.com