There’s a dark cloud building - one that in time could rain down volatility in global markets, behind the world’s best period of synchronous growth this decade among developed and emerging economies.
A deepening imbalance in the lack of new safe-haven assets as the world’s output expands is the problem as identified by strategist and hedge fund manager Stephen Jen.
Creating of sophisticated local markets that feature their own risk-free instruments has not been possible for countries like China and other developing nations which are accumulating wealth. According to Jen’s argument, perpetuating a bond bubble and pushing investors into riskier assets, that phenomena has left a dangerous reliance on U.S. Treasuries.
In order to explain why American borrowing costs were stuck at low levels even as the U.S. hiked interest rates, the “savings glut” argument was put forward by the then-Federal Reserve Governor Ben S. Bernanke in 2005 and it’s a tweaked version of it. These days, undermining the idea that there’s too much savings, Asia’s biggest economies are carrying higher debt loads, and current account imbalances among the U.S., China and Japan have come down.
Instead, assets that investors are willing to hold as stores of value and collateral when times get tough have not been able to be developed by the emerging market and that is the problem. belief that money can be withdrawn by the investor whenever needed, equitable regulation and strong levels of confidence in the rule of law is required for that.
“The local capital markets in EM still lack the sophistication to match the real sectors in these economies,” Jen and colleague Nicolo Bandera wrote in a note last week. They noted the continued growth of emerging markets while their financial systems lag behind produces “a situation whereby the genuine safe-haven assets such as the U.S. Treasuries, German bunds, and the British gilts become increasingly rare and in short supply.”
Jen and Bandera highlighted that the supply of such assets have been further limited by Fed and other central bank purchases of their own government bonds. With attention zooming in on plans to dial back its $4.5 trillion balance sheet, the Fed is widely forecast to raise borrowing costs for the second time in 2017 this week.
Though its capital controls have left foreign investors wary to take full advantage of new avenues to invest in its government bonds, the best chance to develop an alternative to the U.S. Treasuries market is offered by China, as the world’s second-largest economy.
Also, possibly playing into foreign and domestic investor reluctance to embrace Chinese assets as a haven is a history of punishing foreign countries that take actions the Communist leadership dislikes -- such as when South Korea moved to allow a U.S. missile-defense system.
“China should – no doubt – develop a more liquid and open government bond market,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong. Doing so would offer an alternative to Treasuries and help internationalize the yuan, she said.
“Absent of a massively large and liquid sovereign bond market which can act as free-risk collateral and benchmark for other instruments, no currency can ever become an international currency,” Garcia Herrero said. “China seems to have understood the lesson but, still, too much effort is put in developing the corporate bond market. This is like starting a house from the roof.”
(Source:www.bloomberg.com)
A deepening imbalance in the lack of new safe-haven assets as the world’s output expands is the problem as identified by strategist and hedge fund manager Stephen Jen.
Creating of sophisticated local markets that feature their own risk-free instruments has not been possible for countries like China and other developing nations which are accumulating wealth. According to Jen’s argument, perpetuating a bond bubble and pushing investors into riskier assets, that phenomena has left a dangerous reliance on U.S. Treasuries.
In order to explain why American borrowing costs were stuck at low levels even as the U.S. hiked interest rates, the “savings glut” argument was put forward by the then-Federal Reserve Governor Ben S. Bernanke in 2005 and it’s a tweaked version of it. These days, undermining the idea that there’s too much savings, Asia’s biggest economies are carrying higher debt loads, and current account imbalances among the U.S., China and Japan have come down.
Instead, assets that investors are willing to hold as stores of value and collateral when times get tough have not been able to be developed by the emerging market and that is the problem. belief that money can be withdrawn by the investor whenever needed, equitable regulation and strong levels of confidence in the rule of law is required for that.
“The local capital markets in EM still lack the sophistication to match the real sectors in these economies,” Jen and colleague Nicolo Bandera wrote in a note last week. They noted the continued growth of emerging markets while their financial systems lag behind produces “a situation whereby the genuine safe-haven assets such as the U.S. Treasuries, German bunds, and the British gilts become increasingly rare and in short supply.”
Jen and Bandera highlighted that the supply of such assets have been further limited by Fed and other central bank purchases of their own government bonds. With attention zooming in on plans to dial back its $4.5 trillion balance sheet, the Fed is widely forecast to raise borrowing costs for the second time in 2017 this week.
Though its capital controls have left foreign investors wary to take full advantage of new avenues to invest in its government bonds, the best chance to develop an alternative to the U.S. Treasuries market is offered by China, as the world’s second-largest economy.
Also, possibly playing into foreign and domestic investor reluctance to embrace Chinese assets as a haven is a history of punishing foreign countries that take actions the Communist leadership dislikes -- such as when South Korea moved to allow a U.S. missile-defense system.
“China should – no doubt – develop a more liquid and open government bond market,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong. Doing so would offer an alternative to Treasuries and help internationalize the yuan, she said.
“Absent of a massively large and liquid sovereign bond market which can act as free-risk collateral and benchmark for other instruments, no currency can ever become an international currency,” Garcia Herrero said. “China seems to have understood the lesson but, still, too much effort is put in developing the corporate bond market. This is like starting a house from the roof.”
(Source:www.bloomberg.com)
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