The scariest charts in global finance
Laura Frost of M&G Investments and FT markets editor Katie Martin look at what investors should be afraid of this Halloween, from negatively yielding corporate debt to trade war fatigue
Produced and filmed by Petros Gioumpasis
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So, Laura, it's that very frightening time of year again. And I don't know about you but I was thinking of dressing the children up as the bond market to frighten people on Halloween. We've got some charts here that might do just the trick. What are investors scared of at the moment, Laura?
I thought one of the most frightening things was this chart, so negatively yielding corporate debt, so company debt.
We've heard all about negatively yielding European debt in the government space. This is looking at European corporates.
So we've got kind of got used to this weird phenomenon, where investors are handing money. They're paying for the privilege. They're guaranteed to lose money, holding government debt to maturity. But what you're saying is this is leaking into the corporate bond market now, too.
It certainly is. And there's almost a trillion euros' worth, face value, of this negatively yielding debt. The scary thing is that there is that much within the BBB and A universe, as you can see on the chart.
So lending to corporates in countries like Italy that we've heard so much about this year in the news, you get a negative yield.
Something is wrong. Right, so if that doesn't put the fear of God into you, then let's have a look at this one. This is a chart of the high-yield bond market.
Now, this is interesting because if you look at the indices that cover the whole of the high-yield bond universe, it tells you that everything is well in the world, and that these bonds give you a lovely, juicy yield. And everyone's looking for yield, as we were just talking about.
But actually, if you kind of look beneath the surface there are some real stinkers in the high-yield bond market, right?
Yeah, there's some bonds that haven't defaulted...
...that have been invested in by investors basically seeking the yield. So the white line is showing you basically the global high-yield index. Now, over the last 15 years, that's given you roughly 7 per cent per annum of income.
Mm-hm. Thanks very much. Yep, yep.
So investing in yields, investing for that income - fabulous. However, if you actually have a look beneath the surface, because we've got so many tourists in that market, purely there for the yield, without a real, real granular understanding of what they're buying and what they're investing in, all of a sudden, you have a little bit of bad news from some companies - and these are not exclusive. There are a few of them out there.
We've almost had those tourists just selling out at any price.
And that kind of creates a bit of a sort of death spiral, whereby first lot of tourists sell out. The next lot sell out. And you can eat that on a daily basis, if you look at some of these companies, Thomas Cook, obviously, a household name.
You can see here, you know, that's over two days. It lost 20 per cent, 30 per cent of its value in terms of the bond price.
Yeah. Speaking of which, what does it take to get a positive real yield? So what do you mean by real yields here? And how long do you have to wait for this stuff to really start giving you some cash?
OK, so let's just take, you know, the US. So 10 years trading at a yield of about 1.75 per cent , something like that. But, of course, we don't actually receive that because there's this thing, inflation.
So actually, this is showing you how long you have to invest for. Along the green line is the US. You have to invest for 13 years to be able to really capture that positive real yield. And, of course, you know, the US has obviously got the highest level of yield on a nominal scale. So what you see that, 1.7-ish, at the moment, but the inflation factor strips that away.
So look at Europe, which are some of the lines beneath. So you've got the likes of France and the UK and Germany. And, actually, the whole curve, so you could've missed for 30 years, and you're still receiving a negative real yield. And that's why people have been looking elsewhere.
So let's look for the high-yielders in the emerging markets. And you've got the likes of Mexico in the pink, Brazil in the blue. And you can see that they have a higher level of nominal yield.
They also have some inflation. But you're getting three and a half-ish 1 per cent for investing there.
But, again, you've got to know what you're doing, right?
Are we suffering from trade war fatigue? So the market's been very funny this year. Every time we think we've got a headline that tells us there's going to be a deal between the US and China, then the markets pop up. And then they fall.
You know, they fall out of bed again. And we're just kind of constantly going backwards and forwards. It feels like we're getting nowhere. Have people just switched off to this whole thing?
Really interesting question. So I've got two years of data here almost, that starts in '18. Now, obviously, Q4 '18, there was a massive sell-off in credit. So this is looking at the US and European credit, so across the board. Big sell-off as spreads widened.
We've then had in 2019 quite a sort of, quite a large sort of retracement, essentially. Every time Trump puts through a tariff, talks about a tariff, or puts a tweet out, the market reacts in some way. But what's interesting in this chart is those sell-offs are getting smaller. So those upticks are getting smaller.
And on a sort of second note, what is scary is we've only got a year until the 2020 elections. The front runner for the Democrats is now Elizabeth Warren. Elizabeth Warren is militant on trade, so much like Trump.
She is also not a massive fan of large companies, monopolies, oligopolies, also big financials. She's also got things in place where she would bring in a tax on the wealthy, 40 per cent with assets over a billion. So largely speaking, a little bit more market unfriendly than Trump.
And I think the scary thing is, you know, we might end up wishing that actually market-friendly Trump was here...
...in time to come.
Right? I mean, but, yeah, there is this idea that the trade wars are all about Trump. They're not. There is cross-party support.
So it's not going to go away, whoever wins next year. This isn't second world war kind of territory, obviously.
But this is, you know, we're on the kind of... this perception of risk, and this perception of anxiety has definitely been on the up over the past couple of years.
Definitely. So what we're looking at here is the UK, so national debt to GDP, so percentage of nominal GDP. And you can see, if you go back a long, long time, obviously, government debt goes up when you're financing wars. And then what tends to happen is you then pay some of that back.
Take the second world war, for instance. So here's the first. There's the second.
Now, obviously, we paid a lot of that back, which is fine. Go back down. But, you know, the last 10 years or so, we know that government debt's been creeping up.
What do we do to get rid of this? Two things. Firstly, we can basically tax. So we can tax people, and we can end up paying it back that way.
But actually, that's a really difficult thing to be elected on the grounds of, you know? We're going to tax you more. Hope you don't mind.
Or you're reliant upon really high inflation to kind of, you know, inflate or deflate the debt away. It looks like it's going to be difficult. Now, is this the price of democracy? I think this is... it's a new world.
And it's potentially, it's a scary world. What can we do?