30 years of bond investment

0:05Pushkin. So what happens to your brain if you spend nearly three decades in the bond markets? is their life after bonds? Well, luckily, we've done a natural experiment to find out. Today on the show, we're doing things a little bit differently. We've invited in Jim Levis, a veteran, no less, of the bond markets in the UK and friend of the FT to tell us what he's learned in a 30-year career in bonds before he leaves M &G Investments to go into crypto. Not really, not really. Stay tuned. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in London.

0:50And Jim is the Chief Investment Officer for Fixed Income at M &G, overseeing 139 billion quid or so of assets. Yeah, sounds about right. It's more than I get paid in a year. Jim, welcome to the show. It's really nice to have you here. We don't have very many external people on, so consider yourself special. Oh, thank you very much. It's been a delight working with you all over the past years. So look, you're not going into crypto at all. Let's get this out of the way first. What are you going into? What could possibly be more exciting than the bond market? The only thing more exciting than the bond market is actually the history of art.

1:25So I'm off to the Courthold Institute, which is part of University College of London. And I'm going to do a master's in the modernist period, sort of Weimar Germany, hyperinflation period, degenerate art, a bit of Fritz Lang, all of that good stuff. So yeah, I'm going to write a thesis on something or other. Are you going to start wearing a cravat? What do you mean by start wearing a cravat? Are you going to expand your cravat collection? I am. I will have two by the end of this week. So one of the reasons that we kind of wanted to get you in to do this is that you've done a lot over the years in trying to demystify bonds, right?

2:07You know, one of the things that you've done at M &G is launch the Bond Vigilantes blog. It's got t-shirts associated with it. It's got baby grows associated with it. So you founded this thing in 2006. Why? Why do this? Well, 2006 was a period where we had a great bond team at M &G, but there wasn't a lot of love for fixed income it had fallen out of fashion a little bit people had gone back into equities and we always thought actually we've just got to keep out there talking about our asset class explaining it um and also we were quite nervous about some of the developments particularly in the US I'm not saying that we'd predicted exactly what was going to happen in the global financial crisis but if you do go back and read the blog at that time we thought there was a lot of interesting and concerning stuff going in on in mortgages and in the US banking sector in particular so we just wanted to do something interesting and blogs were newish at the time it's before twitter and yeah all of those good things so we had a kind of early adopter benefit that got us a readership and I think we wrote some interesting stuff yeah but so like going back to bonds like as you say stocks are just kind of sexier right absolutely not um i remember starting in the industry 30 odd years ago there were all sorts of stories that stock investing was literally we've got a list of companies we can't invest in because there's a fountain in the reception or the flag poles or the ceo has got a beard or something like that and i was always got the the kind of uh That's what the market was like in the UK back in the early 90s.

3:52And I always thought that bonds, it's just a bit of everything. It's a bit of history, economics, politics, a bit of maths, if you're interested in that. At the time, it just felt like equity investing was go and meet the management and it's, you know, he's a good chap and a good story here. Whereas bonds seemed a lot more putting together everything, giving you an excuse to read anything from the new scientists to some geography book and putting it all together and coming up with something really interesting. So I've always felt that not only is the bond market a lot bigger and more significant than equity markets, but I think they're a lot more interesting and really don't deserve, from the outside, some people think they're boring.

4:38Imagine that. God, what are they talking about? I know. Yeah. As you say, there's a lot of history and theory that's embedded in these bits of paper or these electronic documents that say I, company X or I, country Y, will pay you back this amount of money at this time in the future. It really demands that you make decisions about what you really believe is going to happen in future. So, yeah, there is something kind of quite intellectually satisfying about the bond market. Yeah. And I do love the history. What is to you the number one misconception that people have about bonds or the thing that people find most difficult to grasp?

5:15Now, if you ever read a story about bonds in the FT, somewhere in there, there will be a line in this story that says, yields go up when prices go down and vice versa. So there's something about this idea that the number goes up, but something bad has happened that just fries people's minds. How do you unpack that? I don't know. It's possible. We've tried to draw little diagrams with seesaws on them and things like that that show that prices and yields are inversely related. But I still think people are a bit frightened of maths. And there is a bit of maths in bonds. There are terms like convexity and duration and there are mathematical symbols.

6:00But people don't really use those very much on a day-to-day basis. The computer does all of that. I even came after the time when people had a Hewlett-Packard bond calculator. I've never had to use one of those either. So I think we're over the idea that it's completely out of the realms of knowledge. And I think that, again, 30 years ago, people didn't own bond funds in their portfolios. Whereas now I think most people do at least know what a corporate bond is, that you're lending money to a company. and unfortunately bonds have been in the headlines so much over the you know probably since the global financial crisis that even lay people understand that bonds go up and down and can can go bust they can go bust and they cause all sorts of problems when they do here's a silly question i did warn you there'd be silly questions but i think i know what you're going to say to this what's your favorite bond my favorite bond ever i think is probably war loan and you knew I was going to say that.

7:00I made a documentary about war loan you can find on YouTube and probably showing in a cinema near you at the moment. But these were bonds issued by, well, all countries involved in World War One and subsequently have issued paper to finance that. In fact, it's probably one of the greatest starting points for the bond market was to pay for wars because income taxes didn't really used to exist around the world. It was really just about raising money through borrowing so the UK borrowed a lot of money in World War One we had a bond called war loan and we kind of defaulted on that bond by cutting the interest rate on it never really counted as a default but it probably was one and so some really interesting stories for bond investors around Neville Chamberlain and tanks driving through London encouraging people to put all their money in in these things and you know you can go and find videos again on YouTube of Bugs Bunny doing songs and dance from the Second World War encouraging Americans to put their money in war bonds.

8:02We need SpongeBob SquarePants to be telling us to buy gilts or something that's the equivalent right? Well even recently in Italy for instance the Italian football team did adverts to try and encourage people to lend money to the Italian government and and maybe in a world where debt to GDP ratios the amount of debt that governments have goes up and up they are going to have to rely on individuals to put their savings into to bonds more and so maybe we will see posh and becks do adverts to uh to to buy some national savings certificates and so forth so yes it's a tale as old as time really yeah one thing my mum not a bond market expert i think it's safe to say she once asked me over dinner or whatever she's like i don't get it if everyone owes money to everybody else with these bonds and it's a problem why don't we just write them all off and i was like i i don't have a good answer to this but i'm telling you that can't happen like why can't that happen well i think in that case if if i owe you some money and uh you would be probably quite cross if that was written off yeah but i think you can take that a bit further and say that a lot of the money lots of the bonds owned in the world now are owned by central banks, whether that's the Bank of England or the Fed.

9:17And I think that it might come down to a world where we do think about, well, given that the Bank of England is really, it's kind of like the government, is that not just the government owing money to itself? Why don't we just delete that cell on the spreadsheet and it never happened? And suddenly the UK's debt to GDP ratio falls in half or by whatever it is. And so I think that that is something that you might consider as a possibility. in future but as i said when i've written about this in the past it does feel a little bit banana republicy um and you know what is a bond it's about trust it's you know it's about a legal contract and i think that one of the things around trustonomics you could say that was all about too much government borrowing to without getting the market on side but you could say this was about contempt for institutions you know not going through the obr um so since you bring up Liz Truss, I had this slightly further down my list of things to talk to you about.

10:15But yeah, that moment where Liz Truss and her Chancellor Kwasi Kwarteng blew up the UK government bond market, where does that rank for you in your sort of 30-ish year history in the market as big moments? It was definitely a big moment, but I don't think it was globally systemic. And I think that I knew that the Bank of England would be able to sort it out. You know, this was a liquidity issue, not a solvency issue, which made it different from the global financial crisis, where I was genuinely worried on many occasions, many, many days throughout that period, that this could be a societally ending catastrophe where money doesn't come out of cash machines, where every business is wiped out pretty much.

11:05and that we don't get hold of food. You know, literally there were days when it felt really very, very bleak. Yeah. And I guess the other big event for Bonds was COVID when we kind of realised actually that was bad, but it worked. Unbelievably, we got food. It kind of worked. And it also made you realise... I remember in March 2020, you know, obviously everyone's running around the FT newsroom and it was pretty high pressure. The markets were kind of falling apart, but it was the point at which the equity markets, the stock markets were falling, falling, falling, but it was okay because the bond market was holding, was taking the strain.

11:46The point at which bonds started falling as well, I was like, okay, we're really in some deep trouble here. The central banks sorted it out. Again, they're pretty good at doing that, but that's the moment where you can tell something seriously bad has gone wrong, isn't it? It is. And to your point, the central banks sorting it out, For me, this is a bit thinking about someone else's problem after I've left the world with bonds. There is an expectation now, isn't there, that whenever something goes a little bit wrong, that either the government or a central bank will step in. There's always been this idea of the Greenspan put, that if stocks wobble, then the Fed will cut rates.

12:22But nowadays, there's an expectation that the unemployment rate can never go up, that no company can ever go bust, that no bank can ever default. and I worry a bit that that ending of the idea of creative destruction is going to lower for society as a whole the growth rate or the productivity we'll never get the good companies able to come through and that's a difficult thing to say that maybe it's good for bad things to happen but I think there is a bit of a this this safety net idea just means that you just get a perpetual ratcheting up of risk assets and nothing can ever go wrong and maybe that stores up something really bad going wrong one day.

13:03That's fine until it's not again a problem for your successor unless it happens between now and October right so but thinking back again to the long span of your career what was the best year you ever had where it was just like shooting fish in a barrel like you could not go wrong in the bond market? Well, you can't really say my best years were the global financial crisis without sounding like a complete idiot. But those were the years that bond yields fell dramatically. And during that process, credit spreads got really, really wide. So for bond investors, you'd done very, very well out of falling government bond yields.

13:44And then coming out of the crisis there were just dramatic opportunities in credit because even things like whilst the mortgage market was regarded as the epicenter of this crisis if you'd invested in triple a rated u.s mortgage bonds the safe stuff yeah you didn't really take losses and so you're able to buy triple b rated corporate bonds in europe or the u.s with spreads of 600 basis this point and yeah you know just or more so there were some bargains kicking around bargains yeah and conversely what was your worst year worst times probably i think periods where nothing happens are are quite bad maybe because my scarring in the global financial crisis seeing what happened to credit i think i i have a kind of i never really enjoyed being a corporate bond firm manager like I enjoyed being a macro fund manager.

14:41And that meant I was always a bit underweight credit. And so the years where it just grinds tighter and nothing happens are painful. And actually, I always say to people, credit overpays you structurally versus government bonds. You know, you always get paid too much for investing in credit. But sometimes I didn't listen to my own advice. You know, the spread that you get for investing in a corporate bond always overcompensates you. in aggregate relative to buying a government bond. So, you know, you should own more credit relative to copies. So that's interesting. So investors who buy corporate bonds, they get a bump, right?

15:20They get a bump over whatever it is that government bonds are paying you. Like, why? Why do you think that bump is bigger than it arguably should be? You get paid more because people don't understand them as much. You have to do some research. you have to read a document understand the covenants prospectuses and also I think that the other big reason is around liquidity you know we've had air pockets where people don't want to buy these things off you and so you need to get paid a little bit more than you deserve in order to compensate you for the kind of painfulness of reading the big document and the chance that when these documents are massive they are massive You won't miss them, right?

16:04I've never read a corporate bond prospectus. That's why we have 50 credit analysts. Because it's hundreds of pages, these things, aren't they? Yeah, and somewhere within there will be the little ticking time bomb that will make you lose all your money if something bad goes on. I think the Credit Suisse 81 experience that people had. Read the small print, guys. Read the small print. You weren't going to get your money back if something went wrong necessarily. early. And so that's all in that document. And so someone has to read it, even if it's not going to be me. So one of the things that people have been kicking around in the bond market for a long time tell me a lot is, you know, they suck their teeth and say, it's not like it used to be.

16:45You know, like liquidity is worse, right? So markets are more jerky. They overreact a bit more to seemingly trivial bits of news sometimes. Does that feel true to you? Do you feel like structurally the market is a bit more flighty than it was back in the good old days? I think one thing that's happened really post global financial crisis but increasingly as time has gone on is that investment banks no longer have the balance sheet that allows them to warehouse risk and that has been fine as long as everyone wants to buy corporate bonds because it's very you know if someone wants to buy corporate bonds you go to a company and you say do you want to issue a corporate bond and you issue it so creating that side of the equation the supply of bonds is is really quite easy the other way around which hasn't been tested to the same extent is is who buys those bonds en masse when the market wants to sell those bonds because last you know decades everyone's just wanted to be a buyer of credit but investment banks don't have the balance sheet now to be an aggressive yeah you know necessarily buy them back off you no so i think that partly explains why you have seen occasions where there have been air pockets in credit where you see a gapping up of credit spread so that that would i think there is a bit of that i know you guys write a bit more about liquidity in u.s treasury market for instance that's never worried me as much i've never experienced difficulty either buying or selling a u.s treasury and i'd be very surprised if anyone ever does although maybe you do get you don't necessarily get the price that you want but i still think it's going to be very marginal but you know others do disagree with that yeah yeah on your last thought here what will you miss most about about bonds about about doing what you do while you're twiddling your cravat and and being arty what will you miss most about the bond market um i think i've just missed the whole journey you know starting at the bank of england yeah day after black wednesday and when when gilts were still traded in fractions rather than decimal.

18:52Well, US still does trade in fractions, so mustn't look down our nose on fraction traders. But, you know, a less structured market where you had anomalies, strangely named gilts, never-nevers, daltons. You had lots of strange structures, callability, convertibility and stuff like that. And just to see the evolution of that, the growth of the corporate bond market and, you know, changing the culture has been interesting. as well from a very fuddy-duddy old English ties and top, you know, there were still top hats on the desks at the Bank of England, not worn very often except in fun, but you know, they still existed.

19:34But nonetheless, they were there. Yeah. And so I just enjoyed that and lots of interesting time periods and nice clients, nice journalists, all of those sorts of things I'll miss. Well you've always been on the end of the phone for FT journalists when we've been trying to figure out what is going on in markets So thanks Jim for all of your thoughts over the years We've got you a small present Oh thank you very much I would urge you not to get too excited about it But here you are Thank you, I'll open it now shall I? You can open it now Excellent This is, for those, as it's a podcast, it's a mug and it's got a diagram explaining in modernist terms how prices and yields move inversely in the seesaw manner that we've talked about.

20:24Louis Ashworth on Alphaville, master of mugs, knocked that up for us. That is amazing. He's wasted on Alphaville. Come to the Courthold Institute, Louis. You'll be welcome. Don't give him ideas. Enjoy using your mug. We're going to be right back in a second with Long Short.

20:54Okay, now it's time for long short, that part of the show where we go long a thing we love or short a thing we hate. But I have another surprise for you, Jim. I've surprised you with the mug. I've surprised our listeners by you being here in the first place. So I'm going to do long short a little bit differently. So are you aware of that thing on the internet where it says, name five great albums from the 1990s but none of them can be Nirvana. I'm not aware of that but I wouldn't put Nirvana in my great albums. So here's the thing. First of all that question really annoys me because it implies that there are no good albums from the 1990s that are not by Nirvana which is just wrong.

21:31No, there are five Morrissey albums from the 1990s. So I'll kick off with my five first while you think about yours. You're not allowed more than one from one artist. Right. My five are OK Computer, Radiohead, 1997. Homogenic by Bjork, also 1997. She is a goddess in my eyes. I will hear nothing against her. Elastica by Elastica, 1995. I've talked about that on this show before. I'm willing to go to bat for the second coming by the Stone Roses if you exclude the alligator noises at the beginning and the secret track at the end. It's actually a very solid body of work. the plinkety-plunk piano thing at the end that's the secret track at the end you can't listen to that and then i've got to have some electronic dance music in there somewhere so left field you're gonna say aren't you i'm gonna say either orbital by orbital the the green album purely for chime and belfast that's 1991 or exit planet dust by chemical brothers 1999 right what are your five my memory for stuff like this is really really terrible come on come on come on now so i have a family whatsapp group where we do album of the week every single week and i'm just gonna gonna open my phone now and see if i can find it and and tell you what actually empirically because we rate these all out of 10 right what what they what what the best albums of the 90s really were

23:07okay we've done a certain amount of cheating on the internet here listeners i thought jim was going to ace this but he's it's actually really put him under i'm sweating i'm sweating what's your top five oh funny you should ask me that katie i've gone for morris's maladjusted because i think the the opening track is amazing um i've gone for massive attack and blue lines Primal Scream, Screamadelica Underworld, the one that we can't pronounce but begins with Dub and My Bloody Valentine and Loveless That's a solid list You dropped Oasis in the end I did drop Oasis in the end It is a good album but they are quite annoying aren't they?

23:46They are pretty annoying Yeah, they definitely have their moments Thanks so much for sharing your musical thoughts your art thoughts your finance thoughts we've really covered a lot of ground in this little recording today Yeah, it's been fun. Thank you very much for having me. Listeners, we'll be back in your feed on Thursday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler.

24:23FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.