This is an audio transcript of the Unhedged podcast episode: ‘30 years of bond trading’
Katie Martin
So what happens to your brain if you spend nearly three decades in the bond markets? Is there life after bonds?
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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 Leaviss, 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. 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, and Jim is the chief investment officer for fixed income at M&G, overseeing £139bn or so of assets.
Jim Leaviss
Yeah, sounds about right.
Katie Martin
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.
Jim Leaviss
Oh, thank you very much. It’s been a delight working with you all over the past years.
Katie Martin
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?
Jim Leaviss
The only thing more exciting than the bond market is actually the history of art. So I’m off to the Courtauld Institute, which is part of University College London, and I’m going to do a masters 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 gonna write a thesis on something or other.
Katie Martin
Are you going to start wearing a cravat?
Jim Leaviss
What do you mean by start wearing a cravat?
Katie Martin
(Laughter) Are you gonna expand your cravat collection?
Jim Leaviss
I am. I’ll have two by the end of this week.
Katie Martin
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? You 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 growth associated with it, like . . . So you founded this thing in 2006. Like, why? Why do this?
Jim Leaviss
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.
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 gonna 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 on in mortgages and then 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 all the clones, a good thing. So we had a kind of early-adopter benefit that got us a readership and I think we wrote some interesting stuff. Yeah.
Katie Martin
So like going back to bonds, like as you say, stocks are just kind of sexier, right?
Jim Leaviss
Absolutely not. (Katie laughs) I remember starting in the industry 30-odd years ago. There were all sorts of stories that stock investing was literally we’re gonna list the companies we can’t invest in because there’s a fountain in the reception or the flagpoles or the CEO has got a beard or something like that. And I was always got the kind of, that’s what the market was like in the UK back in the early ’90s.
And 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, there’s a good chap and a good story here. Whereas bonds seemed a lot more putting together everything, giving you excuse to read anything from the New Scientist 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 now a lot more interesting and really don’t deserve from the outside some people think they’re boring. Imagine that.
Katie Martin
What are they talking about?
Jim Leaviss
I know. I know.
Katie Martin
Yeah. As you say, there’s a lot of history and theory that’s embedded in these bits of paper, all 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 gonna happen in future. So yeah, there is something kind of quite intellectually satisfying about the bond market.
Jim Leaviss
Yeah. And I do love the history.
Katie Martin
What is to you the number one misconception that people have about bonds or the thing that people find most difficult to grasp? Now, if you ever read a story about bonds in the FT, somewhere in there, there will be a line in the 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?
Jim Leaviss
I don’t know. It’s possible that we’ve tried to draw these diagrams with see-saws 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, but people don’t really use those very much on a day-to-day basis. The computer does all of that. I even came up at the time when people had a Hewlett-Packard…
Katie Martin
A bond calculator.
Jim Leaviss
. . . bond calculator. You know, 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. Unfortunately, bonds have been in the headlines so much over the, you know, probably since the global financial crisis that even laypeople understand that bonds go up and down and can go bust.
Katie Martin
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 gonna say to this. What’s your favourite bond?
Jim Leaviss
My favourite bond ever, I think, is probably War Loan. And you knew I was gonna say that. I 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 I 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 I, 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, tanks driving through London encouraging people to put all their money 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.
Katie Martin
We need SpongeBob SquarePants to be telling us to buy gilts or something. That’s the equivalent, right?
Jim Leaviss
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 maybe in a world where debt-to-GDP ratio is 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 bonds more. And so maybe we’ll see Posh and Becks do adverts to buy some National Savings certificates and so forth. So yeah. So it’s a tale as old as time, really.
Katie Martin
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 don’t have a good answer to this, but I’m telling you that can’t happen. Like, why can’t that happen?
Jim Leaviss
Well, I think in that case, if I owed you some money and you would be probably quite cross if that was written off.
Katie Martin
A bit. Yeah.
Jim Leaviss
But I think you can take that a bit further and say that a lot of the money, a lot of the bonds owned in the world now are owned by central banks, whether that’s the Bank of England or the Fed. And I think that it might come down to a world where we do think about, well, given that Bank of England is really, is 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 whatever it is. And so I think 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 republic-y. 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 Trussonomics, you could say that was all about too much government borrowing without getting the market onside. But you could say this was about contempt for institutions, you know, not going through the OBR, slagging off the banks (inaudible).
Katie Martin
So look, since you bring up Liz Truss, I had this slightly further down, the topics I wanted to talk to you about. But 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?
Jim Leaviss
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 and that we don’t get hold of food. You know, literally there were days when it felt really very, very bleak.
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 also a major…
Katie Martin
That was the day, like, 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 OK because the bond market was holding, was taking the strain. The point at which bonds started falling as well, I was like, OK, 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?
Jim Leaviss
It is. And to your point, central banks sorting it out. For me this is a bit thinking about someone else’s problem after I’ve left the world of 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.
But 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 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.
Katie Martin
Yeah. That’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?
Jim Leaviss
Well, you can’t really say my best years were the global financial crisis without sounding like a complete idiot.
Katie Martin
(Laughter) Without sounding terrible.
Jim Leaviss
But you know, 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. And then coming out of the crisis there were just dramatic opportunities in credit because if even things like whilst the mortgage market was regarded as the epicentre of this crisis, if you’d invested in triple A rated US mortgage bonds…
Katie Martin
The safe stuff.
Jim Leaviss
Yeah, you didn’t really take losses. And so you’re able to buy a triple B rated corporate bonds in Europe or the US with spreads of 600 basis points and, you know, just . . . Or more.
Katie Martin
So there were some bargains kicking around.
Jim Leaviss
Yeah. Bargains.
Katie Martin
And conversely, what was your worst year?
Jim Leaviss
Worst times probably I think periods where nothing happens are quite bad. Maybe because of my scarring in the global financial crisis seeing what happened to credit, I think I have a kind of . . . I’ve never really enjoyed being a corporate bond fund manager like I enjoyed being a macro fund manager, and 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 those.
Katie Martin
Yeah. So that’s interesting. So investors who buy corporate bonds, they get a bump, right? They get a bump over whatever it is the government bonds are paying you. Like, why? Why do you think that bump is bigger than it arguably should be?
Jim Leaviss
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 wanna 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 . . .
Katie Martin
These documents are massive.
Jim Leaviss
They are massive.
Katie Martin
You won’t miss them, right?
Jim Leaviss
I’ve never read a corporate bond prospectus. That’s why we have 50 credit analysts, so . . . That’s how, you know.
Katie Martin
It’s hundreds of pages, these things, aren’t they?
Jim Leaviss
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. And I think the Credit Suisse-AT1 experience that people had…
Katie Martin
Read the small print, guys.
Jim Leaviss
Yeah, read the small print. You weren’t gonna get your money back if something went wrong necessarily. And so that’s all in that document. So someone has to read it even if it’s not gonna be me.
Katie Martin
So one of the things that people who 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. You 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?
Jim Leaviss
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 really quite easy. The other way around, which hasn’t been tested to the same extent, is who buys those bonds en masse when the market wants to sell those bonds. Because last, you know, decades, everyone just wanted to be a buyer of credit. But investment banks don’t have the balance sheet now to be an aggressive, you know, warehouser.
Katie Martin
They can’t necessarily buy them back off you.
Jim Leaviss
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 spreads. So that would . . . I think there is a bit of that. I know you guys write a bit more about liquidity in the US Treasury market, for instance. That’s never worried me as much. I’ve never experienced difficulty, the buying or selling a US Treasury, and I’d be very surprised if anyone ever does. Although maybe you do get.
Katie Martin
You don’t necessarily get the price that you want, but.
Jim Leaviss
I still think it’s gonna be very marginal. But you know, others do disagree with that.
Katie Martin
Yeah. On your last thought here, what will you miss most about bonds, about doing what you do while you’re twiddling your cravat and being arty? What will you miss most about the bond market?
Jim Leaviss
I think I’ve just missed the whole journey. You know, starting at the Bank of England the day after Black Wednesday and when gilts were still traded in fractions rather than decimal . . . Well, 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, call ability, convertibility and stuff like that. And just to see the evolution of that, the growth of the corporate bond market and, you know, change in the culture has been interesting as well, from a very fuddy-duddy old English ties and top hats — 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 exist.
Katie Martin
Yeah. But nonetheless, they were there.
Jim Leaviss
Yeah. And so I just enjoy enjoyed that and lots of interesting time periods and nice clients, nice journalists. (Laughter) All of those sorts of things I’ll miss.
Katie Martin
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.
Jim Leaviss
Ah, thank you very much.
Katie Martin
I would urge you not to get too excited about it, but here you are.
Jim Leaviss
Thank you. I’ll open it now, shall I? Excellent. Oh. (Laughter) This is, to 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 and in the see-saw manner that we’ve talked about.
Katie Martin
Louis Ashworth on Alphaville, master of mugs, knocked that up for us, so…
Jim Leaviss
That is amazing. He’s wasted on Alphaville. Come to the Courtauld Institute, Louis. You’ll be welcome.
Katie Martin
Don’t give him ideas.
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Enjoy using your mug. We’re gonna be right back in a second with Long/Short.
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OK, 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 today. 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?
Jim Leaviss
I’m not aware of that, but I wouldn’t put Nirvana in my great albums.
Katie Martin
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.
Jim Leaviss
No. There are five Morrissey albums from the 1990s.
Katie Martin
So I’ll kick off with my five first while you think about yours. You’re not allowed more than one from one artist. 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), 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 is actually a very solid body of work.
Jim Leaviss
The plinkety-plunk piano thing at the end?
Katie Martin
That’s the secret track at the end. You can’t listen to that. And then have gotta have some electronic dance music in there somewhere, so…
Jim Leaviss
Leftfield, you’re gonna say, aren’t you?
Katie Martin
I’m gonna say either Orbital by Orbital, the Green Album, purely for “Chime” and “Belfast”, that’s 1991, or Exit Planet Dust by Chemical Brothers (1999).
Jim Leaviss
Right.
Katie Martin
What are your five?
Jim Leaviss
My memory for stuff like this is really, really terrible.
Katie Martin
Come on, come on, come on now.
Jim Leaviss
So I have a family WhatsApp group where we do album of the week every single week. And I’m just gonna kind of open my phone now and see if I can find it and tell you what, actually, empirically, ’cause we rate these all out of 10, what the best albums of the ’90s really were.
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Katie Martin
OK. We’ve done a certain amount of cheating on the internet here, listeners. I thought Jim was gonna ace this, but he’s . . . It’s actually really put him under pressure.
Jim Leaviss
I’m sweating. I’m sweating.
Katie Martin
What’s your top five?
Jim Leaviss
Oh, funny you should ask me that. (Laughter) OK, see, I’ve gone for Morrissey’s Maladjusted, ’cause I think the opening track is amazing. I’ve gone for Massive Attack and Blue Lines, Primal Scream’s Screamadelica; Underworld, the one that we can’t pronounce but begins with Dub; and My Bloody Valentine and Loveless.
Katie Martin
That’s a solid list. You dropped Oasis in the end.
Jim Leaviss
I did drop Oasis in the end. It is a good album, but they are quite annoying, aren’t they?
Katie Martin
They are pretty annoying, yeah. They definitely have their moments.
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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.
Jim Leaviss
Yeah, it’s been fun. Thank you very much for having me.
Katie Martin
Listeners, we’ll be back in your feed on Thursday, so listen up then. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.
FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer.
I’m Katie Martin. Thanks for listening.
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