It must be remembered that bond yields are inversely correlated with bond prices, when demand for Treasuries decreases, prices fall and yields rise to attract more buyers to the market.
Whatever the cause, rising bond yields are a big problem for the government as it tries to finance growing federal budget deficits (it paid $1.13 trillion in interest in 2023, outpacing spending on national defense or Medicare). . And he delved into the explanation: in quantitative easing operations, the Fed buys Treasury bonds on the open market, this greater (artificial) demand drives bond prices upward and puts downward pressure on yields, being an ideal scenario for the Government that needs all the help it can get to ease its addiction to debt and spending.
But the Fed carries out quantitative easing operations with money created out of thin air that it injects into the monetary system and the economy. The Fed is between a rock and a hard place, it needs to reduce interest rates for the Treasury but in doing so it risks reigniting inflation that is not exactly dead and buried.
The issue reignited the debate and a former US Treasury banker warned that we could be facing a secular bear market in bonds. What characterizes interest rate movements is their generational duration phase, not necessarily cycles, but there are phases: interest rates fell during the last quarter of the 19th century, rose during the first 20 years of the 20th century, fell since 1920, in 1946 they rose in 1946 until 1981, they fell from 1981 to 2021. So, at every juncture, there was some sign of excess, some sign of an explosion of speculative excess. In 1981 a Fed Funds rate of over 20% seemed excessive, in 1984 a 14% yield on long-term bonds when the CPI was at 4/5% seemed excessive.
What is clear is that the Fed can manipulate short-term interest rates through diktats, but it doesn’t have the same kind of control over long-term rates, and that’s a big problem for the government fighting the rapid rise. of borrowing costs. That’s why it’s interesting, he added, that gold has continued to break records despite rising bond yields, when historically, rising interest rates are a headwind for gold.
For now, an Argentine manager who has lived in California since the ’90s commented on the latest “carry trade” global and the fixed and variable income market. He noted that there were significant purchases of the Danish crown and moderate purchases of the dollar, the Norwegian crown, the Swiss franc and the Canadian dollar, while the moderate sales were focused on the euro, the Australian dollar, the Swedish crown and the pound sterling and with lower intensity in the yen and the New Zealand dollar.
In the region, there were light purchases of the Peruvian peso and moderate sales of the Colombian and Mexican peso and light sales of the real. In fixed income it saw fund flows of moderate purchases from New Zealand, Australia, Canada and the US, with slight purchases from Great Britain and moderate sales from the Eurozone and Denmark with slight sales from Norway while the region saw moderate purchases from Peru with slight purchases from Brazil and Argentina and slight sales from Mexico and Chile.
At the equity level, the latest surveys showed moderate to significant sales in all sectors globally, especially in the industrial, health and financial sectors; and light purchases in communications services. While at the regional level there were moderate sales in developed markets and moderate sales in emerging markets.
At the local level, the people from BCP Securities were very active, arriving to analyze the Argentine situation and give a conference to investors and clients. According to what they commented, the visit allowed them to observe the policies that the Milei government is implementing, which would mark a decisive turn in the trajectory of Argentina.
The people from Excel Capital Partner were also visiting, with the Newman boy, Cristian Reynal, at the helm along with executives from the management company abrdn. The performance of the frontier market debt fund was analyzed a lot. It seems they were visiting Allaria, Balanz and Inviu.
While Toto Caputo celebrated with his Anker partners the LatinFinance award for Minister of Finance of the year, a kind of “B” financial award, those who know the game explain that being on the cover of Institutional Investor or receiving a Their prize is something else, it is being from the “A”. What was considered was the BCRA’s reserve purchases in October, which surprised everyone.
They find an explanation for the improvement in agriculture compared to the 2023 drought and a greater liquidation of exports in the expectation of the end of the Blend dollar, the impact of the recession on lower demand for imports and the reversal of the balance of the energy balance. It was an atypical October, they acknowledge at the tables. Even so, they still warn that the BCRA’s net reserves remain negative at around US$4.6 billion. They believe that the CCL dollar should begin to slow its decline, after having fallen 4.5% monthly in September and October. Of course this was possible due to the interventions of the BCRA. A lot of noise with ON placements in conjunction with money laundering, where surprisingly low placement rates of around 3% were seen over 3 years.
According to what attendees at the IIF meetings said, which brought together heavyweights, including Janet Yellen (head of the US Treasury), several Wall Street and London CEOs and central bankers, there was a tsunami of data, information and rumors. . For example, one panel said there are 1.7 billion adults worldwide who are banked, most of them in emerging markets and developing economies, hence the interest in tokenization, which presents a transformative opportunity.
From what we have seen so far, they say that the most juicy thing was the round table on regulatory affairs and transition finance, the one on global priorities in the regulation of the financial sector and the debate on market fragmentation. Risk, a hot topic for IIF partners, was addressed by Linda French, Emmanuel Givanakis, Satoshi Ikeda, Ludivine Labarre, Piyush Agrawal, Sharon Donnery and Ryan Zanin. There was time to discuss transition financing, as Darryl Chan, Jérôme Jean Haegeli, Alan Levy and Sandra Phlippen dove into the “climate crisis” while Kenny Fihla, Jamie Franco, Starla Griffin and Elizabeth Seeger shared their perspectives on the creating a better investment environment in emerging markets, and Judson Berkey, Satoshi Ikeda, Tomohiro Ishikawa and Meaghan Muldoon highlighted the challenges of international alignment in transition planning.
The elections in the US were the focus of the debate between experts from The Wall Street Journal and Bloomberg. The budget issue was also debated by specialists from the Milken Institute and Hoover Institution, Stanford University, and the Congressional Budget Office. China was another axis of discussion between the people from Natixis and JP Morgan and the BIS and other experts while the dollar and global and emerging debt occupied the panel made up of Claudio Irigoyen, Mário Mesquita, Saleha Mohsin, Carsten Brzeski, Arnab Das and Lori Heinel.
At a break, the IIF awarded Yellen with the Distinguished Leadership and Service Award for sustained and distinguished contributions to the global economy through public service. Another enriching panel was the global economic outlook panel between Tim Adams (IIF) and Martin Wolf and Raghuram Rajan.
There was a table of central bankers and the Basel Committee, and another on the geopolitical tensions that await the new US administration. Between breaks, they commented on Japan and the drop in inflation below 2%: it was the first drop in five months but where the main factor was the reintroduction by the Government of subsidies for electricity and gas rates.
Hence the talk of the yen: the BOJ’s monetary policy remains heavily influenced by exchange rate trends, so these underlying price movements and changes in service prices suggest that achieving the 2% inflation target remains a challenge, which could cause the BOJ to act cautiously on further rate hikes.
The yen briefly appreciated to 139 per dollar in September, but has since weakened again, reaching the 150 yen range days ago. This prompted statements from the Ministry of Finance to curb the depreciation of the yen. If the yen continues to weaken, the government could intervene in the foreign exchange market by selling dollars and buying yen when the exchange rate reaches the 155-160 yen range. In that case, the new administration, which has shown a cautious stance on further rate hikes, could change its stance and coordinate with the BOJ to avoid further depreciation of the yen, which could boost inflation. This could raise expectations that the BOJ will raise rates.
In such a scenario, the Bank of Japan could decide to raise rates at its December policy meeting. However, this is a risky scenario. If the yen’s depreciation does not accelerate rapidly, the standard scenario remains that the BOJ will delay further rate increases until January next year, limited by the numerous factors mentioned above.
Source: Ambito
