Government Bond of the Year – Austria 2.1% due 9/20/2117. Back in 2017 when it was issued, the policymakers at the Austrian Treasury looked like geniuses. Can you imagine naive investors wanting to lock up EUR 5.8 billion in 100-year debt for a paltry yield of 2.1%? But in August, the bonds traded at a price of 214.8 and a yield of 0.57% thanks to the flood of central bank easing intended to hold off recession. Put differently, had the Austrian Treasury waited a couple years, they could have saved the Austrian taxpayer EUR 8.9 billion in interest cost over the life of the bond. Nun haben wir den Salat! Can government bonds that trade anywhere in price from 112-215 be considered ‘safe’?
Corporate Bond of the Year – Party City 6 5/8 % due 8/1/26. Like most corporate debt this year, the bonds were trading well with a dollar price of about 100. And then, like most CCC-rated bonds, the helium came out of the price and it plunged to about 50 with a yield of over 20%. While it is true the company struggled with the generally tough conditions in retail, the shortage of helium for party balloons and a shift in how consumers sourced Halloween costumes, there is a bigger story here. Corporate debt investors are becoming increasingly fussy about the amount of leverage managements are piling onto shaky financials. The combination of secured bank debt (USD 1.25 billion) and bond debt (USD 0.85 billion) resulted in gross leverage approaching 7x for Party City. Just how much leverage can corporate debt withstand in a prolonged period of sub-trend growth?
Central Bank of the Year – Everybody Gets a Participation Award. By our count, 41 central banks cut rates 66 times for a cumulative total interest rate reduction of nearly 3,100 bps. Throw in a return to quantitative easing by the European Central Bank (ECB) and the end of balance sheet run-off by the Federal Reserve (Fed)—and you have shock and awe via teamwork for sure! It worked. Both the economy and the markets stabilized. Millennials, rejoice … but not too much, lest the central banks try to pull that liquidity rug out from under us too soon.
Central Banker of the Year – Christine Lagarde. What can I say? I know she’s new, but I like her. Maybe I’m giving her too much credit and her first press conference as ECB President was an accident: Maybe she ”forgot” to talk in riddles, use unintelligible jargon and mix metaphors. But I’m going to take the high road and say that we have a winner. She left me believing that she understood there was a terminal velocity to the unconventional tools the ECB could deploy and that efforts needed to shift elsewhere. I believe she will use her experience as IMF chief and France’s Finance Minister to work with Brussels on ways to initiate some reasonable fiscal spend and structural reform. Monetary policy can no longer be the only game in town.
Currency of the Year – Gold. Gold started the year at 1280 and then rocketed up to 1550 in the summer as global recession risks rose. There have even been rumors that European insurance companies have been buying it in place of long sovereign debt for a pick-up in yield—which probably says more about the state of European government debt than gold. But, gold has cemented its place as the go-to safe haven in the current economic climate.
Comeback Player of the Year – Quantitative Easing. Let me confess that I missed it. I didn’t really care all that much for 2018 as central banks were running down their balance sheets and bond prices were deflating. The probability of recession was just getting too high. Heck, I don’t know if it helps to stimulate growth and raise inflation expectations, but I’m sure liking the asset price inflation again.
Villain in a Leading Role – Trade Wars and Tariffs. There is no more obvious winner in any category. Trade wars and tariffs simply lead to less trade, which means lower GDP and thus leads to a higher probability of recession. Is the best solution to work toward zero tariffs and let the global economy operate and rebalance on its own? It is true that the trade war provoked the central banks into a massive ease, but it also led to a global manufacturing recession. For those who need to know, the runner-up was the yield curve inversion.
Unsung Hero – Corporate Credit. I just didn’t think it would have this good a year all the way into December. At some point, the manufacturing recession had to spill over into consumer spending—but it didn’t. U.S. investment grade credit, U.S. high yield and European high yield have all posted substantial inflows and double-digit returns. While leverage has risen, default rates are still low and that is enough to get investors to pile in and earn a better return than cash (or negative yields in Europe and Japan).
Rookie of the Year – Sustainable Investing. It’s a new award this year, but the future is now for the winner. Environmental, social and governance (ESG) factors are not only measured and considered when making investments, they are genuinely changing the way companies think, behave and act. This is leading to a lower cost of capital for companies with higher ESG scores and an explosion in green bond issuance. How sovereign and securitized debt is scored going forward will be one of the challenges for the bond market.
Most Valuable Player – President Donald J. Trump. Look, he got the Fed to cut rates even though they indicated they wouldn’t a year ago. That led to a tidal wave of global central bank ease. Plus, he eventually crafted trade deals with his border allies (Mexico and Canada, for those geography-challenged). And now, during the holiday season, there’s a Phase 1 deal with China. Besides, I named him Central Banker of the Year last year and didn’t get a tweet (or a re-tweet) … maybe this year. If not, I’m pretty sure between the trade war, the impeachment proceedings and the general election I’ll have a shot to award him something again next year and get another crack at a tweet.
Lifetime Achievement Award – Paul Volcker and Mario Draghi. Allow me to put away the snarky comments for a moment to reflect on these two giants. Paul Volcker, who just passed away, was genuinely a larger-than-life figure in central banking (besides standing 6’7”). I started my career just as he had increased the fed funds rate to 20% from 5% just a few years earlier. That helped to break the back of inflation and set central banking on a new course whereby unconventional policies were considered. I strongly believe we are in the mirror image of the period he operated in. Disinflation rather than high inflation is the risk. Yet, central bankers must be just as creative in dealing with these unexpected environments.
That leads nicely to Mario Draghi, who just handed over the ECB reins to Christine Lagarde. His courage to do whatever it takes ushered in an era in which negative policy rates and bloated balance sheets are accepted central bank policy tools and not merely short-term and unconventional. It helped to hold together the euro and reminded us that central banks are capable of being all-powerful.
Both these gentlemen remind us that being innovative, courageous and proactive are traits we should all aspire to, not just central bankers.
 Now we have the salad (lit), an Austrian idiom that translates roughly to “That’s a fine mess.”
Each year, J.P. Morgan Asset Management makes a satirical list of bond market awards, it is meant for entertainment purposes only. As an asset manager, J.P. Morgan Asset Management does not provide investment advice. As such, the information above should not be construed as investment advice or a recommendation to buy or sell a security.
As of the date of publication, JPM holds position(s) of the above mentioned securities in one or more account(s)
The views contained herein are not to be taken as an advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice.