I always feel terrifically sorry for most fixed-income investors. They may have benefitted from a huge decades-long boom in bond prices but now they are left with a terrible quandary – where to invest all those profits. Yields are low and might be heading lower again as the central banks change policy. That’s forced many bond investors up the risk curve, into property debt and EM debt. Do these still provide investors with a sensible risk-adjusted return? My guess is that for many bits of the property spectrum, the answer is increasingly… no.

Whereas for EM debt, I’m much more positive. The yields are roughly the same in the narrative below, with both in the 5 to 6% range.

So to UK real estate debt first and more specifically residential orientated debt. I’ve quietly championed two retail bonds from Lendinvest which I thought were mispriced a while ago. I still think they represent fair value but I do note with interest the recent update on the portfolio of loans on which these two bonds are based. I’ve pasted in below a good summary from Mark Glowrey who writes the excellent Daily Fix for City and Continental. The tables below show the pool of loans and key metrics.

Overall, I think these look to be in good shape with no defaults – so far – on 2022 bond pool of loans. Interestingly though the 2023 bond has a different profile – notice that the Q1 segment of 53 loans is showing 3 loans in arrears with a total value of £1.3m. Nothing obviously explains what’s going on here.

The LTVs look sensible as does the interest cover. Crucially one might have expected more defaults on loans with more seasoning i.e the 2018 cohort. But it’s the recent Q1 loans that seem to be showing some stress. Maybe the risk officer was having a bad start to the year or are we only now seeing signs of stress amongst very recent borrowers? Who knows.

Now as I said there’s nothing obviously worrying here but I do think this speaks to my general concern that we are likely to see some increase in stress amongst UK resi loan books – as we have already seen with some P2P lenders in this space (mostly in bridging loans it must be said). Sentiment alone, I think, will have a powerful negative effect for the next year until the Brexit crisis clears. My hunch is generally to stay clear although I think the Lenidinvest bonds remain a sensible hold for most existing investors.

LendInvest 5.25% 2022 (issued July 2017)

LendInvest 5.375% 2023 (issued March 2018)

Anyway, over in EM debt, by contrast, I think the market has already shaken out amateur buyers and is now beginning to look more appealing – with yields of well above 5% not uncommon. Obviously there are all the usual caveats about the difference between local currency and hard currency loans and the strength of the dollar but its nice to see analysts at GMO agreeing that the asset class looks to be on the “cusp of neutral to cheap. This is also how we would currently describe local market emerging debt” according to GMOs Carl Ross in a quarterly report titled “Valuation Metrics in Emerging Debt.”

Some hard numbers behind this observation?

According to the report the valuation multiple used by GMO stood at 3.1x on March 29, 2019,

“significantly lower than the 3.6x we saw at end-December 2018. The ratio remains below long-term historical averages, but it is well off its historical lows. The historical minimum ratio was 2.1 in April of 2007, when the spread on the EMBIG index was +161 bps and the 10-year Treasury yield was 5.0%, compared with +378 bps and 2.41%, respectively, at the end of the first quarter”.

The chart below gives us a long look at relative ratios.