Talking Points:
- The world's largest central banks have taken a significant stake (ownership) of their government bonds
- Stimulus was meant to charge economic activity - perhaps even lift markets - but it has detrimental side effects
- Treasuries are turning into speculative assets, undermining their ability to signal health and act as safe havens
Having trouble trading in the FX markets? This may be why.
Is there a recession or financial crisis enveloping the global economy? If we were to evaluate government bond prices and yields without accounting for massive stimulus programs, we would be led to believe so. However, most market participants nowadays know that we need to make our assessments of markets with the understanding that the remarkable programs from global central banks is leading to significant distortion.
While the list of detrimental side effects of extremely accommodative monetary policy holds a range of more dangerous items, the interruption of a key reading for economic and financial health is an important one. We have used Treasury yields in past years and decades to assess the approach of a recession (inverted yield curve), projections of monetary policy changes (rate hikes or cuts) and even the threat as well as intensity of financial crisis (bid for ultimate safe havens). It is the undermining of this last role that is the most disturbing.
Government bonds of high-rated sovereigns is considered the highest order of safety for global money managers. Demand fades when we shirk a harbor for capital to in turn search out higher returns. When fear spreads, capital rushes in for safety. Under massive stimulus, the world's most prominent havens are stuck in 'extreme panic' mode. That undermines the signal that we are given, but it also poses a more troubling question - does speculative appetite flee or rush towards Treasuries in another bout of trouble? There is certainly a heavy 'front-run-the-central-bank' presence in this asset. The answer is not clear. More troubling, it is a global issue and more intense for the likes of the Bunds (Euro-area), JGBs (Japan) and Gilts (UK). We discuss how this is a problem for FX and all traders in today's Strategy Video.
To receive John’s analysis directly via email, please SIGN UP HERE