Recently, the conversation has been turning to why US treasuries and other bond markets have been so soggy in performance, especially considering the apparent record trading ‘speculative’ short. Is this also a flow phenomena?
The answer is, as ever, not a single factor. Recent CPI data was lower than expected but remains very clearly above the Fed’s target and with wages finally showing signs of acceleration, markets have belatedly come to the realisation that the Fed is very much intent on raising rates to its short-term trajectory (3.25%-3.50% in 2020), rather than the medium-term neutral rate (2.75%- 3.0%) and it was not as if the Fed had not
told them. Ms Brainard did so again in mid-September. However, perhaps most pertinently, especially with our urn filling analogy, is the typical high seasonal levels of corporate issuance. Investment grade bonds had issuance of over 125 bln $ for the first three weeks of September. In addition the front loading of US Corporate Pension fund purchases of Treasuries due to tax advantages that expired that on 15 September, being a positive flow has ebbed to a close. The Fed is upping its balance sheet reduction programme to the assumed peak pace of $50 billion per month (selling bonds), while the US Treasury ups its borrowing volume, and EM central banks look to defend their currencies reducing their FX reserves and by extension their holdings of Treasuries. Last but not least the inflows to the US as a result of the corporate tax earlier in the year have not been vaguely close to the $1.0 Trln plus that Trump keeps on talking
about, so less repatriation of funds into treasuries than had been expected.
The demand for bonds has been lower than would have been estimated, the flows bigger, so Treasuries have gone down. As they fall, rates go up. However, very recently the dollar has not benefited from this. That is concerning. The pot is wobbling again.
During the last few years as the pot has gotten (that’s American speak) fuller and fuller, the flow dynamics in the pot have been reinvented with the advent of increased technology. Now the flow decisions are primarily automated. Decisions are made by computers and consequently, there is no real human emotion rocking the pot from outside; even the retail investor has his money locked into the low cost tracker network. Not knowing any computers intimately enough to chat with, the question still remains to what it is that will eventually destabilise the pot.
Logically, one would assume it will be an algorithmic trigger: Calculative Loosening in Mathematical Algorithmic eXposure - ‘CLIMAX’ as it is known, but without whimsicality, it might simply be that the pot is not big enough now to take any more liquid. It is full and the liquid simply runs over the top constantly with the tap still on. Soon people notice that the pot is not wobbling but not actually increasing in liquid worth any more. What is being poured in is actually just going straight down the drain anyway.
Now the pot is full and the drain is active, the situation becomes increasingly dangerous if all the flows within the pot change direction.
Andy Ash E:
andy.ash@
admisi.com
21 | ADMISI - The Ghost In The Machine | September/October 2018
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36
