Bond Vigilantes

Inflation is one of the great economic debates and often leaves big economic thinkers at loggerheads. I am not a financial titan, but looking at the world from 100,000 feet, the conditions are in place for the world to see inflation heading meaningfully lower. For years, inflation has been too low for comfort for the world’s major central banks. Inflation remained elusive despite ultra-accommodative policy through negative interest rates and an eye-watering amount of quantitative easing (QE). It wasn’t until a pandemic that shuttered economies…

Inflation remains one of the most important topics for investors and consumers. The sharp increase in prices we experienced after Covid has put enormous pressure on households, while financial markets generally sold off as Central Banks started to engage in an aggressive tightening cycle. In a blog I wrote in November, I stated that we were starting to see some light at the end of the inflation tunnel, but we were not there yet. Since then, things have improved and I believe we are now…

Jim and I have recently come back from a fascinating trip to Tokyo, meeting multiple economists, strategists and government officials. What is clear is that trying to navigate Japanese bond markets against the current macroeconomic backdrop, both domestically and globally, may be even harder than watching the two of us trying to navigate the Metro. Let’s start with Yield Curve Control (YCC) Why didn’t new governor Ueda change YCC policy at the latest meeting? Whilst we heard conflicting expectations for upcoming meetings, a key theme…

Seventy years on from the crowning of Queen Elizabeth II, her son Charles III will ascend to the throne on Saturday 6 May. The coronation will mark the beginning of a reign that looks far different at the start to that of his mother’s, as we look at some of the key economic markers and graphs. Fit for a King – The cost of your castle House hunters on the eve of King Charles’ coronation will be paying a princely sum for their new home…

We have spent over 15 years talking about quantitative easing (QE) and quantitative tightening (QT). Each phase of QE has become increasingly more significant, resulting in a huge final dose of monetary creation in response to the COVID crisis. This money is now being cancelled.
To recap QE is the printing of money. Theoretically, this is expected to be inflationary. Increasing the supply of something will reduce its value, all else being equal. Traditionally this was implemented with old world technology: the printing press and then reversed in the furnace. It is now achieved electronically: money created from thin air at the magic press of a computer button, and cancelled in the same manner.

After a trip to Washington DC, for the IMF and World Bank Spring meetings, here are five thoughts. These were gathered from various panels and meetings with finance ministers, Central Bank Governors, plus IMF and World Bank staff. While the best insights were country specific, there is a lot of macro driving markets right now and several important global themes to track.

Is the dollar losing its status as the King of currencies? Dollar hegemony refers to the dominance of the United States dollar as the world’s primary reserve currency, which has been in place since the end of World War II. The dollar has been the world’s reserve currency for decades, meaning that countries around the world hold large quantities of U.S. dollars to facilitate international trade and finance. The global dominance of the U.S. dollar has given the United States enormous economic and political power….

Investors have abandoned Norway’s NOK. The NOK is this year’s worst-performing G10 currency and is flirting with its all-time lows; it’s pretty much there if you strip out the COVID extremes. Some weakness is understandable. Household debt as a % of disposable income (chart below) is one of the highest in the world. Norway, like Sweden, is heavily exposed to variable rates; any changes should slow consumption growth as household debt-servicing costs increase. Countries in this situation find themselves in a bind. Continue to raise…

What do you get when you have a $200bn bank fail in a high inflation, slow-growth, rising rate environment? While “contagion” or “global systemic risk” are reasonable answers, we don’t think either will ultimately prove accurate in the case of Silicon Valley Bank.

For a long time, it has made no sense to keep money under your mattress or invested in cash-like instruments (short dated, fixed return) such as money market funds, without facing an inflation-adjusted loss. Now, we find ourselves in an environment where aggressive hiking cycles globally have meant deep curve inversions across major markets and short dated yields sky rocketing over the last year. It is now possible to see returns of 5% in the US for virtually risk-free assets, if you assume there is…

I work as a corporate credit analyst at M&G. I like my job, but I find it frustrating at times, for example when I have to deal with restated numbers and unresponsive management. I’m particularly annoyed by the lack disclosure around reverse factoring (also called supply chain financing), because I see that type of funding as a debt-like liability, but when it is not disclosed, I cannot be sure about my debt and leverage calculations which are key in my credit analysis. In addition reverse…

JAPAN – this won’t end well Japan has one last strategy – HOPE. Let’s quickly recap the last twenty-odd years of Japanese monetary and fiscal policy and look at where we find ourselves today. The fiscal numbers don’t look pretty, with debt as a % of GDP at 260% versus other major countries at circa 100%. The below table reads like a Stephen King Novel but is, in fact, the budget of Japan PLC. The issuance of Government debt finances 40% of annual expenditure (less…