Displaying items by tag: bonds

(Beijing)

China is beginning its retaliation against the US’ increasing intense trade policy. The country is unloading its holdings of US Treasuries at the fastest pace in two years alongside the big rupture with Washington over trade. Its US Treasury bond holdings are one of China’s arsenal of weapons to retaliate against the US’ tariff hikes. According to Deutsche Bank’s chief economist, “The sheer size of [China’s] reserves and that this is even becoming a conversation means the market should take it seriously”. The country owns $1.12 tn worth of Treasuries.

FINSUM: This is quite a risk for the US as someone would have to absorb all those sold assets, and if they flooded the market, it would cause major volatility and sharp yield rises.

(New York)

Bond ETFs ae set to break a landmark record this year—$1 tn in AUM. The number is a big deal for bond ETFs, which got off to a slower start than their equity counterparts. In recent years, though, bond ETFs have seen huge inflows as they allow investors a more liquid option for both strategic and longer-term allocations. The market is also seeing a good deal of innovation, with more nuanced approaches spreading much like they have in equities.

FINSUM: Overall this is excellent news for investors. More AUM means more liquidity, more options, and lower costs. There are still some fears about a liquidity mismatch between the ETF and the underlying blowing up during a crisis, but those have never materialized.

(New York)

Investors are currently worried about corporate bonds. On the one hand performance has been pretty good, especially for the riskiest bonds. But therein lays the problem—highly indebted companies have not been punished and there appears to be way too much corporate debt at the moment. This is the Fed’s view and many market participants, but Goldman has shared another—that the amount of corporate debt in the economy is just fine and corporate balance sheets look healthy. The bank says US companies are in an “unusually healthy position this deep into a business cycle expansion”. Goldman notes that companies are spending a smaller share share of their cash flow on interest than they were a decade ago, and that they are earning more than they are spending.

FINSUM: The corporate debt situation is all about perspective. Things look better than in the last crisis, but anyway you slice it, the debt burden looks at least somewhat daunting.

(New York)

One of the most famous names in bonds, Jeffrey Gundlach, has just put out a bold statement. Gundlach thinks there is forthcoming trouble in markets and he thinks it is the Fed’s fault. Specifically, Gundlach thinks the bond market is set for a lot of volatility. “interest rates cannot maintain the low volatility they have maintained over the last eight years”. To be clear, Gundlach is not calling for a recession, but says “But I am starting to think it is much less of a lock that there won’t be a recession before the next recession”.

FINSUM: There are two conflicting ideologies here. The Fed thinks volatility is largely an extension of the economy and policy, both of which it feels it can control to an extent. Gundlach and many other investors think there are underlying forces in the economy and markets that can only be pacified for so long. We think they are both right to an extent.

(Washington)

Investors, take a deep breath, everything about the rate outlook has changed in the last 36 hours. For the first quarter of this year, investors thought we were on an inevitable course for rate cuts as the Fed appeared highly dovish. Then the last two days happened. First, Fed chief Powell delivered a much more hawkish speech than expected, saying that the factors that were holding inflation down were just “transitory”. Then, jobs data this morning blew everyone away with 263,000 jobs created in April.

FINSUM: We think these two factors are a big deal. It is very far from clear the Fed is going to cut (we think the risks are now skewed toward a hike). What makes this worrying is that a lot of the rally this year has been predicated on a dovish Fed.