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One of my fundamental beliefs about investing in credit markets is it’s possible to find the best risk-adjusted return opportunities through fundamental credit analysis and value identification across the capital structure—flexing between high yield bonds and bank loans. I take a value investor’s approach to the below-investment grade market to look for opportunities tied to dislocation and mispricing.
Just when it seems like monetary policy has gotten as abnormal as possible, a monetary authority says, “Hold my beer.” Among the more extraordinary examples is and has been Japan, where the Bank of Japan is considering ways to force already negative interest rates further negative.
This is the painting of oneself into a corner. On one hand, Japan is carrying a tremendous government debt load—well over 200% of GDP at last count. On the other, all that government spending seems not to be generating the anticipated economic activity. Rather, growth is stagnant, as is inflation, while the population is declining—a deadly combo. Meanwhile, the government’s hyper-focus on keeping exports up requires it to maintain an artificially undervalued yen.
What a difference a decade makes: Greece, which not long ago was bailed out not once, but twice, and whose interest rates seemed headed for triple digits, has issued negative-yielding debt. Exhibit 1 shows generic Greek 10-year yields since 2010—and their dramatic fall.
A smattering of global headlines.
Investors Should Fear More Competition Among Ratings Companies
Does competition among ratings agencies tend to lower the bar or raise it? The evidence presented here would suggest it lowers the bar. Perhaps the way to address the ratings agencies is to fundamentally restructure the business model—for example, if potential buyers paid for ratings, instead of the issuers, agencies would have an incentive to provide an accurate rating to the buyer, rather than satisfy the issuer they were looking sufficiently favorably on their business. Just one idea (with its own flaws—no solution is perfect).
Just one day into the quarter, markets are off to a rough start—likely resurfacing memories of Q4 2018 and raising questions about whether we’re in for a redux. Time will tell, of course, and in the meantime, here are some of today’s interesting headlines.