Bond yields begin to signal another global ‘recession’

Few fund managers have ridden the 40-year bull market in bonds quite as successfully as Bill Gross, self-styled “king” of the fixed-interest world.

But the losses that led to his departure last week as head of the Janus Henderson Global Unconstrained Bond Fund are in fact only the latest in a series of miscalls that make you wonder whether he ever properly understood these markets in the first place. At the height of the financial crisis, he warned that UK gilts (government bonds) were “resting on a bed of nitroglycerine”, and that the UK economy was therefore a “must-avoid”. With mounting public debt across Europe, this was a common view, but it was also wrong.

Over the next two years, 10-year UK bond yields – which move inversely to prices – more than halved, as indeed you would expect in a period of great economic distress.When the going gets tough, households and businesses save more and spend less. The resulting surplus of cash has to go somewhere, so it tends to chase so-called “risk-free assets”, or Government bonds.

Credit risk on those bonds only becomes an issue when the country is self-evidently insolvent, as occurred with Greece. In a jurisdiction with its own currency, however, there is virtually no risk of default. In extremis, the central bank can simply print the money to pay its debts. That Mr Gross failed to recognise this truism was something of a surprise.

In any case, when bond yields fall and prices rise, it is not a mark of economic virility, but of weakness. It will not have escaped your notice that with central banks now scrambling to reverse previous tightening stances – the Bank of England finally capitulated last week – bond yields are again testing record lows. The German 10-year bund is virtually negative again. Even the UK 10-year yield is back down to 1.15pc. These are powerful recessionary indicators. Until a week ago, I thought we would narrowly avoid another global recession. But the data is looking increasingly grim, and it is no longer possible to be confident.

Don’t worry about it. It’s a non-issue which will all sort itself out in the end. This broadly summarises the attitude of Willie Walsh, chief executive of International Airlines Group, owner of British Airways, to the looming problem of Brexit, or rather, the insistence by the European Commission that in order to maintain flying rights within the European Union in the event of a no-deal Brexit, IAG will need to be more than 50pc owned by EU interests.

This is a problem for IAG, and indeed potentially even for Dublin-registered Ryanair, both of which will be majority owned by non-EU residents once Britain leaves.Happily, it is not so much of an issue for easyJet, whose founder, Stelios Haji-Ioannou, has helpfully shifted his 30pc plus family stake from London to his native Cyprus. Job done.

Mr Walsh’s apparently careless attitude is, of course, perfectly understandable on one level. He believes, as most of us do, that realpolitik will eventually prevail, and that some sort of a deal will get done. There is little point in spelling out how you plan to deal with a problem which in all likelihood will not occur. But what if it does? IAG has some impressive names on its board of directors. They would not be taking off into the blue yonder without a flight manual.

So what are the options? Forcing investors to sell is not a route that any board would wish to go down. Similarly, making some shares non-voting. Both strategies would offend basic principles of equality of ownership among investors.

Another potential solution would be to demerge the group back into its national constituents: British Airways, Iberia and Aer Lingus; but this would still leave Iberia and Aer Lingus with the same problem of being majority owned outside the European Union. It might also be destructive of shareholder value.

Ownership rules around airlines are something of a throwback to the past and, in the UK at least, have effectively already been abandoned.

Almost anyone can get a UK licence these days, provided they can find a place to operate from. Flag-carrier privileges are maintained through other means, namely monopoly of the choicest landing and take-off slots. But the EU is insistent, and the series of trusts that IAG and other multinational airline groups have established to accommodate national sensitivities are deemed not good enough in this case.

Laughably, Iberia is technically controlled by El Corte Inglés, a Spanish department stores chain, but it doesn’t seem to help. So here’s one idea that is being floated in the City. IAG is 21.5pc owned by Qatar Airways which, in turn, owns 49pc of Air Italy. If some way of shifting Qatar’s stake in IAG to Air Italy could be found, it might solve the problem.

Cosmetic, legalistic nonsense perhaps, as well as another gravy train for the City’s corporate fixers, but that’s Brexit for you. My invoice will be in the post if it proves a runner.Well, this is a treat – a rare opportunity to congratulate the European Commission on a decision well taken. I’m referring to the move to block the merger of Siemens’ rail interests with those of Alstom, a deal sold on the basis that it was vital that Europe develops a national champion in train and signalling manufacture to compete with the likes of China’s CRRC.

The argument, strongly backed by the French and German governments, always was nonsense, if only because CRRC does not yet provide any meaningful competition to Siemens and Alstom in non-Chinese markets, and is most unlikely to if Europe properly looks after its economic interests in a wider sense.

So, good work Margrethe Vestager, the European Competition Commissioner, for refusing to bow to political pressure and holding to the still entirely valid belief that monopolies are bad for consumers, bad for innovation and bad for economic advancement in the round. Veritably foaming at the mouth at her defiance, both the French finance minister and German economics minister have said they will seek to change Europe’s antitrust laws to make such mergers easier.

With the irritably pro-competition Brits removed from the process, they may well succeed. In which case, one’s despair over the future of the European Union multiplies. There are better ways of competing against the cheating, stealing Chinese behemoths than creating a matching monopoly.

A good start would be to demand reciprocal access to Chinese markets, use of appropriate non-tariff barriers to keep inferior, stolen technology out, and an absolute ban on companies in receipt of state subsidies.