The scariest charts in global finance | FT

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. Take our survey and tell us what you like about our YouTube channel and would like to see more of:

So laura it’s a 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 yeah we’ve heard all about negatively yielding european debt in the government space this is looking at european corporates if 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 debts of maturity but what you’re

Saying is this is leaking into the corporate bond market nattu it certainly is and there’s almost a trillion euros worth face value of this negatively yielding debt the scary thing is that you know there is that much within the triple b 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 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 everyone’s looking for yield as we were just talking about yeah but actually if you kind of look beneath the surface there are some real stinkers in the high-yield bond market there’s some there’s some bonds that haven’t defaulted yeah that have been invested in by investors basically seeking the yield so the white line

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Is showing you basically the global high-yield index now over the last 15 years that’s given you roughly seven percent per annum and of income so very much you know 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 yeah purely therefore the yield yeah without a real real

Granular understanding of what they’re buying 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 there are a few of them out there yeah we’ve almost had those tourists just selling out any price right 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 you can see that on a daily basis if you look at some of these companies thomas cook obviously a household name yeah you can see here you know that’s over two days it lost you know 20 30 percent 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 and how long do you have to wait for this stuff to really start giving you some cash okay so let’s just take you know the u.s. so ten years trading it we have about one point seven five something like that but of course we don’t actually receive that because there’s this thing inflation no actually this is showing you how long you have

To invest for along the green line is the u.s. you have to invest for 13 years to be able to really capture that that positive real yield and of course you know the us has obviously got the highest level of of yield and a nominal scale so what you see that 1.7 is at the moment that the inflation factor strips that away so look at europe which are some of the

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The lines beneath so you’ve got the likes of france and the uk and germany and actually the whole curve so you can invest the 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-yield errs 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 you know three and a half ish percent but again i know what you’re doing exactly yeah exactly yeah are we suffering from trade war fatigue so the markets been very funny this year every time we think we’ve got a headline that tells us is going to be a

Deal between the us and china then the markets pop up yeah and they they fall that you know they fall out of bed again list yeah and we 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 two starts in in 18

Now over cq or 18 there was a massive sell-off in credit so this is if ting at the us and european credit so across the board big sell-off spreads widened we’ve then had in 2019 quite a sort of quite a large sort of a 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 and the front-runner for the democrats is now elizabeth warren elizabeth warren is militant on trade and so much like trump she is also not a massive fan of large companies

Monopolies oligopolies also big financials she’s also got thinking things in place where she would bring in tax on the wealthy 40% 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 the actually market friendly trump was was here it mattered under car right i mean

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But yet there is this idea that the trade was all about trump they’re not there is glass party supports it’s not gonna go away whoever no wins next year this isn’t second world what kind of territory obviously below but this is you know we’re on the kind of this this perception of risk and this perception of anxieties definitely been on the earth 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 a

Second no 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 debts been creeping up what do we do to get rid of this two things firstly we can basically tax so we’ve got 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 yeah oh you’re reliant upon really high inflation to kind of you know inflate little deflate a debt away it looks like it’s very difficult now is this the price of democracy this is if it’s a new world yeah and it potentially it’s a scary world what can we do

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The scariest charts in global finance | FT By Financial Times

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