Keeping an eye on things
Retriever writes
But isn’t the point that hedge funds tend to have fairly short time horizons, and that bonds close to redemption will be trading close to par – leading to limited scope for making money in the way you suggest? I’d have thought that what you suggest only works if you can hold the bonds for a long time – so it might work for life insurers even if it doesn’t work for hedge funds?
Golden Retriever (golden.retriever@dogs.k9.gov) sent us a long email about the previous post. This reminds me I haven’t replied to his previous mail about whether actuaries should be regulated. I didn’t reply because I didn’t know the answer, but UKSA is currently preparing its submission to the BEIS consultation so I may have an answer soon.
In the previous post I wrote
It necessarily follows that there is some cast iron guaranteed way of making money by buying into dips in the credit market. As bond prices fall, buy more bonds in the certainty that they will rise again.
Retriever objects:
If a bond is currently trading below par, then would I not expect to make money by purchasing the bond and redeeming it at par? Not a cast iron guarantee perhaps, but pretty likely surely, since investment grade corporate bonds don’t seem to default very often.
Tracy Blackwell’s (Pension Insurance Corp) reply to Jonathan Ford’s Sunday FT article.
A fine piece from Ford of the FT today on pension buyouts.
Continue reading “Pension buyouts carry needless credit risks”
For FTSE 100 and 250 stocks with dividends to be paid by end of September: 40% down on the level this year, as opposed to 60% down for Q2. So, you know, getting somewhat better.
Corporate bonds generally back to pre-virus levels, with a some troubled exceptions (aviation, tourism).
So perhaps the PRA was right in claiming that volatility is short term, and that what goes down is bound to go back up in time.
No, you know we don’t believe that.
The Treasury Committee made the fatal mistake in their June letter of asking Andrew Bailey how the PRA it can determine that bond spread widening is the effect of illiquidity not anticipated defaults. NEVER ask a regulator how or why it has determined something, for then it will tell you in a way that means nothing.
See here for this letter of 29 June (but only just published) from Andrew Bailey, Governor of the Bank of England, to Mel Stride, chair of Treasury Committee, in reply to Stride’s letter of 10 June with questions following on from the Treasury Committee evidence session on 20 May.
It really is the most astonishing thing I have ever seen coming out of the Bank, and there is material for many posts. But I will start with the weirdest one.
An interesting passage from the IFRS accounting standards
The core principle in IAS 36 is that an asset must not be carried in the financial statements at more than the highest amount to be recovered through its use or sale. If the carrying amount exceeds the recoverable amount, the asset is described as impaired. The entity must reduce the carrying amount of the asset to its recoverable amount, and recognise an impairment loss. IAS 36 also applies to groups of assets that do not generate cash flows individually (known as cash-generating units). [My emphasis]
IAS 36 applies to all assets except those for which other standards address impairment. The exceptions include inventories, deferred tax assets, assets arising from employee benefits, financial assets within the scope of IFRS 9, investment property measured at fair value, biological assets within the scope of IAS 41, some assets arising from insurance contracts, and non-current assets held for sale.
Continue reading “UK Banking System is One Big Impaired Asset”
A great piece from Ford of the FT this morning. Insurers don’t have to mark down the virus losses on their bond portfolios on the assumption that the spreads will narrow back down again. Analysis from Dean Buckner, a former insurance regulator at the UK watchdog, has estimated that six large UK insurers collectively ran up £28bn of mark-to-market losses on their bond holdings as of the beginning of June, etc.
But the worry is that “a large number of bonds subsequently default or get downgraded to junk. That would force the insurer to crystallise a sudden and potentially much more substantial loss. ”
Quite. The comments as always are instructive. Buckner is accused of being a ‘mark to market fundamentalist’. Correct. If you value the balance sheet above its market price, you are defrauding prospective shareholders who might want to buy. If you value the balance sheet below its market price, you are defrauding existing shareholders who might want to sell. You should not be defrauding shareholders, who bear the brunt of the risk. Therefore value the balance sheet at best estimate of its market price.
L&G have been much in the news recently, so too has our own Dean Buckner, with star appearances in the Financial Times, the Times and the Daily Mail (see also here) and all in two days.
The fur continues to fly over L&G’s planned June 4th dividend, but the attention is shifting subtly from the dividend itself to the underlying valuation methodology and the central issue is (one again) the Matching Adjustment.
There is also the issue of the firm’s ‘virus spread’ losses or, more precisely, Dean’s estimate that these could be up to £10.3 billion. Dean has stirred up a right hornets’ nest this time.
Here is my take.
Continue reading “To Be or Not to Be, L&G’s £10 Billion Question”