Bond of the Year – Austria 70-Year: So many choices…Brazil local debt put in an Olympian effort, with yields falling about 400 bps and the currency returning about 20%…US high yield rose to a 10% yield and then plunged down toward 6%. But, Austria managed to get a 70-year issue off weeks before the US elections, and at a yield of 1.5% – which is below the inflation rate the ECB is targeting. Imagine that – locking in 70 year funding at a negative real borrowing rate!? And, by the way, 70 years ago Austria hadn’t fully emerged from post-war Europe and the Marshall Plan. I won’t be around 70 years from now, but maybe someone will dust off this blog and get a good chuckle.
Best Thriller – The US Elections: In truth, it wasn’t even close between the elections, Brexit, or the Italian referendum. Brexit has yet to be triggered and the markets have shaken off the Italian vote. But a Trump win and a Republican sweep of the government? The markets were so offside and still scrambling to price that 5% probability as the new base case. What a thrilling first 100 days we’re in for, with plenty of market ups and downs. After so many years of dormancy, pulling so many policy levers at once will keep volatility high and the central banks running for cover.
Central Banker of the Year – Mark Carney, BoE: I know Brexit dealt him an unsolvable riddle – but it looks like he will go down in history as the last central banker to cut rates and expand asset purchases. It’s only been a couple of months since those moves and Brexit hasn’t actually been triggered, but UK growth looks firm and inflation is set to crest above the BoE’s 2% target. With the gathering tailwinds of Trump-o-nomics, don’t QE and ZIRP look oh-so-dated?
Comeback Player of the Year – Inflation: At the end of last year, everyone was tripping over themselves to lower inflation expectations and usher in the next leg of the deflationary spiral. Oil had cratered and industrial metals were unwanted as mighty China stopped consuming. In the US, while unemployment was low, so was wage growth. The bond market, taking all this in, sanguinely priced 10-year TIPs break-evens at 1.2% in February. And then a strange thing happened…oil ticked higher thanks to production cuts, China spent again, and wages started to rise. All of that was going on BEFORE the election of a pro-growth, pro-inflation president. Ten-year TIPs break-evens at 2% today just seem too low to me; I expect them to trade at 2.5% by the summer. And a diversified commodities basket looks pretty good, as well!
Currency of the Year – Japanese Yen: I’m just going to hand out the award and stop trying to figure out how the yen defied gravity for most of 2016. The more money the Japanese printed, the more they cut rates and the more they expanded asset urchases…the higher the yen went…at least until recently. I can’t imagine what arrows the BOJ and Mr. Abe will pull out next.
Unsung Hero – Corporate America: Maybe the equity investors stuffed the ballot box on this one…but as a bond investor, there was much to worry about in corporate earnings – the top line was drifting lower, cash was warehoused overseas, and balance sheets were levered as debt issuance was used to buy back shares, raise dividends and buy each other. Nonetheless, companies were disciplined and took costs out along the way. I can’t remember a time when Corporate America looked leaner. A combination of tax cuts, fiscal spending and deregulation should have an enormous profitability impact on corporate earnings. Suddenly, high yield spreads at 425 bps don’t look so expensive. And yes, equities look terrific so I’m buying more convertible bonds.
Villain in a Leading Role – Emerging Market Debt: I don’t understand why local emerging market bonds continue to get dumped like sand bags over the side of a hot air balloon. They had one of the few things that the rest of the bond markets didn’t have – a positive real yield. And their currencies had already gone through a significant adjustment. A global economic acceleration, even if centered in the US, must surely be good for emerging market economies that are export-oriented. Can it all be simply fear of potential Trump protectionist policies? Or are we still unwinding some of the dramatic inflows into EMD following the financial crisis, which until the taper tantrum looked…well…bubble-like? Frankly, I think EMD is misunderstood and expect to jump back in once the selling energy has died out.
MVP – Pension Fund Plan Sponsors: Credit where credit is due…after watching 30-year yields plunge from 3% at the start of the year to nearly 2% by mid-year, plan sponsors held their nerve and resisted the temptation to de-risk. It wasn’t pretty. Funding ratios plunged and despair set in as their liabilities expanded and the ‘stuff’ (non-bonds!) they held failed to keep up. Now they are heading into 2017 with a glorious tailwind as their liabilities are rapidly deflating and their ‘stuff’ is rapidly appreciating. Their discipline, nerve and patience are refreshing…especially when viewed alongside the rather reactionary and extreme policies of central banks over the last several years.