12 09 2018 | by Victor Xing | Capital Markets
All articles 196
10 14 2018 | by Victor Xing | Capital Markets
Roundabout path in the snap-back of long-term bond yields
09 23 2018 | by Victor Xing | Central Banks
Calm before the storm as quantitative tightening looms
05 20 2018 | by Victor Xing | Central Banks
Alternative narrative on the natural rate of interest
01 07 2018 | by Victor Xing | Capital Markets
Flatter yield curve a symptom of ineffective tightening
12 04 2017 | by Victor Xing | Central Banks
Bond market term premium and wolves of Yellowstone
10 17 2017 | by Victor Xing | Capital Markets
How we learned to stop worrying and love the “fake markets”
09 20 2017 | by Victor Xing | Central Banks
QE’s distributional effects a rising political liability
04 18 2017 | by Victor Xing | Capital Markets
Persistent low volatility threatens active fund managers
02 17 2017 | by Victor Xing | Economics
Looming risks through the prism of bifurcated housing market
10 16 2015 | by Victor Xing | Central Banks
What are negative effects from the FED’s “ultra-expansionary monetary policy”
There are negative effects from prolonged “ultra-expansionary monetary policy” (one of FED Vice Chair Stanley Fischer’s famous sayings). Some investors also like to call it economic distortions as a result of financial repression.
- Former FED Governor Jeremy Stein made a case that low short-term interest rates are pushing investors traditionally active in that sector further out of the yield curve, thus taking more duration risk. In his view, this constitutes as a form of financial stability risk [speech text]. My perspective is that many investors also increased leverage in order to achieve higher outright returns (not adjusted for risk)
- Low borrowing cost induce risky behaviors such as issuing debt to buy back stocks. We’ve seen this on the trading desk on a daily basis, and it was just mind boggling. Due to lower growth, many companies also opted to creating synthetic growth via debt-funded M&A [Bonds for Buybacks Never Bigger in U.S. as $58 Billion Sold]
- A number of investors argued that the U.S. Shale Revolution was largely made possible by cheap High Yield borrowing, which subsequently pushed down prices of oil and sent shock-wave through the financial sector and the real economy. The investors also argued that these investments effectively constituted asmalinvestment, spurred by desperate investors “reaching for yield.” I also wrote about this in my answer to “Is the mining and resources boom about to move into the next phase of growth, or are we headed for a world recession for many years?”HY ex-energy vs. HY energy chart from WAMCO’s Oil and High-Yield Energy Brief
High yield bonds have recently weakened following years of ultra-expansionary monetary policy - Cheap financing and the post-08 housing market also facilitated other anomalies such as: Wall Street Is My Landlord.
- Greenspan FED’s policies post dot-com and 9/11 laid the groundwork for further reflationary distortions and sector-specific asset price inflation. In the spirit of his focus on housing, below is a chart showing rental inflation (Owner Equivalent Rent) on a YoY basis vs. headline inflation (weighed down by energy and China import prices). Rental inflation is running at pretty staggering 3.09% YoY
Ultra-expansionary monetary policy managed to offset the significant private sector deleveraging, but the reflationary effect had been concentrated in the asset markets (housing sector)
Next article10 15 2015 | by Victor Xing | Central Banks