Author: Matt King

The yield is not enough

• It’s not just a stronger economy
• Nor even those long and variable lags
• It’s that markets are being driven by money flows and not rate levels

Don’t blame QT for the bond backup (free to view)

• It is often said that QE held down bond yields, meaning QT should be a major contributor to this year’s rise
• But the evidence for this is deeply questionable
• QE does indeed hold down real yields, through a portfolio balance effect
• But it also pushes up inflation breakevens via signalling
• What is missing so far from this round of QT is the historical fall in breakevens
• The true driver of higher bond yields lies with inflation, not QT

Central bank liquidity update

• CB liquidity still a better explanation of risk asset performance than many fundamentals
• H1 liquidity injections now fading
• Market performance – despite some prior ‘excess’ – largely fading in line
• Prospects mostly negative but depend on RRP, BoJ and explanation for the prior ‘excess’

Capital flight from China

• Net capital outflows from China have accelerated sharply in recent months
• They are now running at a near-2015 rate
• The only real source of ‘inflows’ is a drop in prior foreign lending by domestic banks as they divert capital onshore – but even this can be interpreted as a sign of vulnerability