Banks

BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Economy

Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Currencies

Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Banks

Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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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.

© Chris Gorman / Evening Standard / eyevine

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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