Author: Matt King

The counterintuitive truth about deficits​

Central bank liquidity update

• Poor risk asset performance in Sep/Oct reduces gap to CB liquidity
• Fed $300bn reserve increase over past eight weeks helps explain renewed rally in S&P
• Conversely, despite talk of stimulus, China liquidity injections remain lacklustre
• Liquidity outlook still driven by RRP – and is much less negative than might be expected

The mind-bending maths of fiscal financing

• Persistent fiscal deficits are increasingly cited as the #1 reason to short bonds
• But the historical record is remarkably and perplexingly clear
• High debt levels, and even high fiscal deficits, have historically been associated with bond yields falling, not rising
• Only in part does this reflect factors like financial repression
• It is also due to the counterintuitive nature of the credit creation process itself

Free clip: The yield is not enough

• Is the mini-correction in markets a foretaste of something bigger, or does the still-strong real economy give risk assets scope to bounce back?
• Should investors be rotating out of equities and into bonds, or are the latter still vulnerable to buyers’ strikes against a backdrop of fiscal indiscipline?
• Free to view by all registered subscribers

Full replay: The yield is not enough

• Is the mini-correction in markets a foretaste of something bigger, or does the still-strong real economy give risk assets scope to bounce back?
• Should investors be rotating out of equities and into bonds, or are the latter still vulnerable to buyers’ strikes against a backdrop of fiscal indiscipline?
• Open to clients with Group Webinar or One-on-One subscriptions

Webinar: The yield is not enough

• Webinar Wed 1 Nov 1600 Lon / 1200 NY
• Is the mini-correction in markets a foretaste of something bigger, or does the still-strong real economy give risk assets scope to bounce back?
• Should investors be rotating out of equities and into bonds, or are the latter still vulnerable to buyers’ strikes against a backdrop of fiscal indiscipline?
• Open to clients with Group Webinar or One-on-One subscriptions, and to the press

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