Back by popular demand, we present Bob Michele's annual "Bond Market Awards" - including central banker of the year, villain in a leading role, rookie of the year, MVP, bond of the year and more!
Government Bond of the Year – UK Inflation-Linked Gilt 0.125% due 3/22/68. Those wild and crazy central bankers kept telling us inflation would be transitory as it was motoring up into the high single digits. While investors tried mightily to push government bond yields higher, central bankers fought us with a combination of near-zero official rates and ongoing balance sheet expansion. The moderate increase in nominal yields relative to inflation meant that real yields plunged and inflation-indexed securities rocketed higher in price. Nowhere was this more pronounced than in the UK, where nominal Gilts have returned -1.8% year-to-date (YTD), compared to this long-dated inflation-linked Gilt, which has returned +15.8%.
Corporate Bond of the Year – Hertz 6% due 1/15/28 (defaulted). So much liquidity, so few defaults, so many choices … it only seems fair to go with an unsecured note that went through bankruptcy … only to be paid in full. The roller-coaster ride for the notes saw USD104 in February 2020, USD10 during the company’s May 2020 bankruptcy filing and then par (USD100 – in fact, around USD107, including accrued interest) as Hertz exited bankruptcy in June 2021. This story is about so many things: the uniqueness of the pandemic and recovery, the excessive liquidity bidding for distressed assets and the fallacy embedded in quoted default and recovery rates.
Central Bank of the Year – Banco Central do Brasil. How can you not be impressed by the bravata of this crowd? Rather than cross their fingers, close their eyes and hope inflation (as it was rising from 4.5% to 10.7%) would magically be transitory, this plucky lot raised official rates by a whopping 7.25% (from 2% to 9.25%). While it is true their 10-year government bond yields rose by ~360bps, kudos to them for maintaining their credibility and throwing shade on developed market central banks. Come to think of it, at this level of real yields heading into 2022, I just don’t own enough Brazilian local debt …
Central Banker of the Year – Kuroda-san. Brilliant, simply brilliant. Don’t mess with your official rates or asset purchase policy, then stay out of the press and let inflation come to you. After years of trying, the Bank of Japan (BoJ) is watching pipeline inflation prints not seen in four decades. Japan is certainly the one economy where we are all hoping that the inflation registered in producer prices doesn’t prove to be transitory but actually becomes embedded into national consumer prices. We are also reminded that the best central banker’s “open mouth operation” may have been to keep their mouth closed.
Most Valuable Player – the Consumer. The consumer has emerged from the pandemic fully energized. Perhaps the combination of vaccines, remote environments and fiscal transfers has created a feeling of invincibility. Our look at deposit balances and loan servicing shows that the U.S. consumer has plenty of financial strength left. As the demand for goods seems insatiable, lower unemployment and higher wages could drive consumption for years to come … at least, until central banks materially drive up the cost of financing such spending.
Currency of the Year – Chinese Renminbi. In a year when both emerging market currencies and safe haven currencies depreciated against the dollar, the renminbi was up around 2.5%. Regulatory regime shifts, the debt burden, a creaky property market and the new “Common Prosperity” mantra only seem to be ripples for the supertanker that is China Inc. and the renminbi.
Comeback Player of the Year – Commodities. The Bloomberg Commodity Index has returned around 25% YTD. Certainly, energy prices, which almost doubled, have led the increase. But it is broader based than that: Industrial metals and agriculture products are also up around 25% each. It’s also a reminder that the best inflation hedge may simply be to invest in the raw materials that are appreciating.
Villain in a Leading Role – Inflation. The runaway winner this year. Developed markets are posting mid to high single-digit year-over-year price increases, while emerging markets have reached double digits. This is a lot more than supply chains. Inflation has become embedded in input costs and wages, and companies have little choice but to pass them on to consumers. If this is what transitory looks like, I want no part of it. The lesson from the oil shocks of the ’70s and early ’80s is that so-called transitory supply shocks can be very painful, as is the process for wringing the embedded inflation out of the system. Watch out … central bankers look to be underestimating what a monumental task they have in front of them.
Unsung Hero – Non-Agency Commercial Mortgage-Backed Securities (CMBS). Year-to-date BBB rated non-agency CMBS have returned ~9.6%! This was meant to be the year of reckoning for commercial properties. The remote and work-from-home movements were going to create structurally higher vacancy rates, resulting in lower lease payments and deflated property values for lenders. But quite the opposite has happened: Vaccines and boosters have led a migration back to offices and retailers, while e-commerce has created a tailwind for industrial properties. Our real estate group tells us the momentum is continuing to build.
Rookie of the Year – the Democratization of Markets. Meme stocks, NFTs (non-fungible tokens), cryptocurrencies, Robinhood traders … what are all these things? They’re the latest evidence of the migration from heavily regulated and closed financial markets to greater accessibility by the masses. In just my career, I’ve seen it evolve from the thundering herd of brokers to discount brokers to commission free trading to day traders and now to online/app trading. Certainly, the definition of “value” has evolved as well, but I’m not dismissive of what’s going on. It looks to be part of the future and is certainly adding more of both liquidity and volatility to some asset classes, markets and securities. Our own Chase Institute data confirms the inclusion of the younger and less affluent in the markets … happy trails!
Lesson Learned – Formula 1 Abu Dhabi Finale. The fastest and best doesn’t necessarily win the race … a bit of good fortune and flawless teamwork can ultimately prevail. If you haven’t watched the race yet, spend the hour and a half to see it from start to finish – you’ll see what I mean. I know this is an unusual award, but I received more feedback on my Spring F1/DRS blog than any other! May good fortune be with all of us for investing in 2022!
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.
Data as of December 13, 2021.
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.
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