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By Bilal Hafeez 06-11-2019
In: post | Newsletter

Macro Hive Deep Dives: Credit When Yields Rise / Banks Predict Bonds / Profitable ESG?

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(total reading time: 3 mins)

Many investors are worried about credit markets. And most cite higher government bond yields as a trigger for the big sell-off. Yet, the relationship between government bond yields and credit is not what you think. Our first Deep Dive reviews a joint Fed and Wharton Business School paper that finds that high yield regimes often see corporate bonds perform relatively well.

As for what drives government bond yields themselves, some excellent academic work finds that certain line items in bank balance sheets have predictive powers for bond returns. Finally, a recent AQR paper delves into the investment case for environmental, social, and governance (ESG) investing. The results are not as straightforward as many would hope.





Government Yields Do Not Affect Corporate Bonds The Way You Think (3 min read) In any given country, government bonds are thought to be safer than corporate ones. After all, governments have the ability to tax or even print money through their central banks. This would suggest that corporate bond yields should generally be higher than government bond yields. And many investors think that government credit risk is a component of corporate credit risk. However, recent research by the Federal Reserve of San Francisco and Wharton Business School questions this line of thinking.


Fishing for Yield

In their paper, ‘Corporate yields and sovereign yields’, they find that when government bond yields are high, corporates can often issue at lower yields.

(6th November, 2019 │Bilal Hafeez)



Bank Balance Sheet


Bank Balance Sheets Predict Bond Returns (3 min read) Investors often try to use flow and positioning data to forecast market returns, whether in bond, equity, or other asset markets. The challenge is to find data that aids prediction rather than just backward-looking explanation. The academic paper, ‘The Banking View of Bond Risk Premia’, by UCLA’s Valentin Haddad and Berkley’s David Sraer suggests that, at least for bond markets, looking at the balance sheets of banks could do just that: predict bond returns.

(6th November, 2019 │Bilal Hafeez)



What Type of ESG Investing Makes Money? (3 min read) Dissecting a company’s quarterly earnings report, digging into business models, and looking for signs of mispricing: for most value investors it’s their bread and butter. In a world plagued by insider scandals, climate change warnings, and brazen CEOs, interest is surging in a new potential source of value – environmental, social, and governance (ESG) investing. Europe alone has some $12tn committed to sustainable investing and there has been a 70% growth in smart beta ESG assets under management.




Governments can more easily hit their environmental targets, pension funds have new outlets for their cash, and activists are happy – what’s not to like? It is still unclear, however, how investors best incorporate ESG into their portfolio – and more importantly, does it help or hurt performance? A recent paper by Lasse Heje Pedersen, Shaun Fitzgibbons, and Lukasz Pomorski of AQR Capital Management attempts to conceptualise and quantify the costs and benefits of ESG investing.

(6th November, 2019 │Presiyana Karastoyanova)