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How bonds eat away at the entire financial system
Bonds have long been considered the most boring part of the financial world. They appear occasionally in literature, almost always as a sign of sadness, writes my colleague Robin Wigglesworth in this fascinating cover story for FT Weekend Magazine.
The narrator of the Great Gatsby Nick Carraway was a bond seller and Sherman McCoy In Tom Wolfe‘s The Bonfire of the Vanities traded them. Bonds have never been more prominent in the public imagination than, for example, stocks or mergers and acquisitions of companies. There has never been a “meme bond”. Ian Fleming chose the name Bond for his spy because he thought it was “the most boring name I’ve ever heard”.
Nonetheless, they have played an essential role in the development of human society, from subsistence agriculture to modern times, and have funded everything from wars and railroads to Teslaelectric cars and Netflix. “The bond market is the most important market in the world,” he says Ray Daliothe founder of the world’s largest hedge fund, Bridgewater. “It’s the backbone of all other markets.”
As the bond market has grown larger and more powerful, the importance of banks – historically the workhorses of the capitalist system – is subtly dwindling. The global bond market was worth around $141 trillion at the end of 2022. For now, that’s less than the $183 trillion that the Financial Stability Board It is estimated that banks around the world hold shares, but much of this is actually invested in bonds – a fact that some US banks have recently come to regret.
three decades ago James Carville, the American policy adviser, joked that he wants to be resurrected as a bond market because “you can intimidate anyone.” Since then, the market has grown fivefold. Stricter regulations for traditional lenders due to the recent bank failures in the US will force even more borrowers to buy bonds.
The market now faces one of its greatest tests in generations. Last year, resurgent inflation – the nemesis of fixed-rate financials – triggered the worst setback in at least a century. Total losses totaled nearly $10 trillion, rocking UK pension plans and US regional banks. And although bonds have regained their footing this year, they still face rising interest rates.
Even if the bond market adjusts as it has in the past, its increasing power, scope and complexity is having some uncomfortable implications for the global economy. “This transformation has been extraordinary and positive,” he says Larry Finkhead of BlackRock, the world’s largest investment group. “But we have a regulatory regime that was designed for a time when banks were the dominant players. That does not exist anymore.”
To properly understand the role of the bond market today, you have to go back nearly a thousand years to 12th-century Italy. Read the whole story here.
Top stock managers are hit with “enormous” amounts of uninvested money
Leading active fund managers say they are struggling to attract money from large investors who are holding back amid volatile markets and cash accounts with their best returns in years, writes Madison Darbyshire in New York.
Institutional investors such as pension funds, endowments, and endowments control billions of dollars in capital and are responsible for the majority of allocations to the largest wealth managers. According to this, the cash balance in institutional US money market accounts is currently almost $3.5 trillion Institute for investment companiesa total that has risen steadily this year even as stock markets strengthen.
“There is an enormous amount of money lying on the sidelines” Rob SharpsCEO of the $1.4 trillion manager T Rowe Price, said in an interview. The US-based money manager saw $20 billion in net outflows last quarter and said it doesn’t expect outflows to turn positive before 2025.
His comments come after Federal Reserve aggressively raised US interest rates to curb inflation, which in turn made cash accounts more attractive. The yields of the largest money market funds are currently averaging more than 5 percent and are therefore increasing rapidly crane data.
“Money market funds give you returns that you haven’t had in 15 years,” Sharps said. “Many people are calling for a significant slowdown or recession in the economy, leading to tougher conditions for credit and stocks.”
We’re probably witnessing the worst right now,” he added. “Investors are waiting for the Fed to get out of the way.”
Institutional investors pulled more than $3 billion from active funds last quarter AllianceBernsteinthe $646 billion manager. Seth Bernstein, the chief executive, said that “people are sitting out” after the Fed has supported short-term interest rates and may hike them some more. “They get paid to wait,” he said.
Read the whole story here.
chart of the week
Investors warm to the riskiest US corporate bonds as optimism about the health of the world’s largest economy narrows the gap between the top and bottom echelons of the $1.35 trillion junk bond market, Harriet Clarfelt writes in New York.
The spread between double-B and triple-C bond yields narrowed to a 15-month narrowest of 6.53 percentage points in recent days, before widening slightly to 6.74 percentage points at Friday’s close – which underscores growing investor confidence in the US Avoid a recession, even if the Federal Reserve has hiked interest rates 11 times since March last year.
Such ‘soft landing’ hopes follow a spate of positive data with continued signs of slowing inflation and better-than-expected US growth numbers for the second quarter.
Five essential stories this week
Investors are increasingly betting that Europe will plunge into a painful economic downturn, in growing contrast to financial markets’ belief that the US is headed for a ‘soft landing’.
Carlyle groupEarnings fell last quarter as the buyout group failed to capitalize on a market rebound and struggled to generate interest in a new flagship fund, underscoring the challenge facing the new chief executive Harvey Schwartz. In the meantime, Marc RowanManaging Director of Apollo Global Managementwarned that the lucrative age of private equity buyouts was over.
The USA House of Representatives The China Committee has filed charges BlackRock And MSCI to benefit from investments that aid the Chinese military and undermine American values and security. It said the groups’ decisions resulted in American investors in their funds “unintentionally” financing Chinese companies developing weapons for the United States People’s Liberation Army.
Carl Icahnis the ailing investment conglomerate Icahn Enterprises has cut its quarterly dividend in half to save cash after a short seller criticized the payouts as unsustainable.
Shares in the world’s largest publicly traded hedge fund manager group of men tumbled on Tuesday as performance-related fees and profits plummeted. CFO Antoine Forterre said the group wants to expand further in the lending business and is considering further acquisitions.
And finally
“Venus rebukes Cupid for learning accountability” (1771) © Historic England
For the artist’s 300th birthday Joshua Reynolds, a free exhibition in Kenwood on the edge of Hampstead Heath, introduces the chronicler of Georgian England. And don’t miss out FTWeekend Festival at the Kenwood on September 2nd.
Future of Asset Management North America
Hosted by the Financial Times, in association with Ignites and FundFire, Future of Asset Management North America takes place September 27-28 at etc.venues, 360 Madison Avenue, New York. It will bring together senior executives from leading US wealth managers, including: Capital Group, BlackRock And Goldman Sachs and many more. For a limited time, save up to 20% on your personal or digital pass. Register here
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