The Daily Update - How Things Have Changed!

Whilst updating our Relative Value Model, I came across a couple of zero coupon Euro denominated bonds to be included in the universe. The bonds were of no investable interest to us, but “every little helps” when it comes to keeping the database in a good state of health.

Anyway, this got me thinking. In the “old days”, zeros were more often than not issued in less well known currencies (anyone remember Rand zeros?) or those markets with a more active “retail” presence, like the Aussie or Kiwi market (I’m looking at you, World Bank and EIB). As you could imagine, these bonds were typically issued well below par and 20 or 30 cents pricing at issue was commonplace.

Not so these days with rates around the world where they are! Looking at data from the Bloomberg Barclay Global Aggregate, in the US there are currently 18 zero coupon issues, but only 4 have a maturity of 5 years or more (and priced at 50 cents for the longer dated bond).

Contrast this to Europe, where there are 127 zero coupon issues, 13 with maturity dates more than 5 years. However, pricing couldn’t be much more different, where all bar one of the bonds trades above par. Now we know things are different on the other side of the Channel, but the following does bring it home – currently the Bund 0% 2029 is the highest priced zero coupon German Government bond where an investor has to pay 106.4, will get 100 back in ten years’ time (i.e. a large capital loss) and receives no income in the meantime! Alternatively, why not the German Government 0% 2050? The good news is that it “only” costs 102.50 but the bad news is no coupon for 31 years!

It not just Germany where these extremes exist. Negative debt totals some $16tn out of a total Global Aggregate universe of $56tn of investment grade debt. Japan has some $7tn of debt with negative yields, and the list of countries includes most of the Eurozone, Switzerland, Sweden, and Denmark.

Thankfully our investments have yields well above those mentioned earlier and as regular readers will remember, we continue to favour high quality, longer dated bonds with attractive risk adjusted expected returns.

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