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The Treasury Bond Wrecking Ball. Asset Managers Are Fighting The Central Banks.  

The Treasury Bond Wrecking Ball. Asset Managers Are Fighting The Central Banks.  

“It is gradually dawning on markets that lower dollar interest rates are a fantasy. But higher rates will destabilise fiat currencies.”

Alasdair Macleod

The IMF has warned the US that its massive fiscal deficits have stoked inflation and pose “significant risks” for the global economy. The fund said in its benchmark Fiscal Monitor that it expected the US to record a fiscal deficit of 7.1 per cent next year — more than three times the 2 per cent average for other advanced economies.

Asset Managers in aggregate are badly missing a radical change in cross asset correlations in favor of Gold versus Treasuries. Gold and Treasuries had a close correlation prior to 2020. More recently, that correlation has inverted.

US Treasury Bond yields have continued to sustain a major break of their 45 year downtrend. There is still no end in sight to rising bond yields. 

What is extraordinary is that assets under management keep rising substantially even as price continue to collapse.

 Gold shows the exact opposite.

“Immanuel Kant said, “Man must be disciplined, for he is by nature raw and wild.” Central bankers are men. They need discipline. Gold is being reinserted back into a multipolar currency world to provide it.”

When central banks continue to accelerate their allocation to gold versus Treasuries you might have thought Asset Managers would not want to fight this trend.

 Bonds have collapsed versus US equities too.

Treasury Bonds have fallen so far they are likely to have an impact on US equities.

This collapse in bond markets has come even in a background of chronically weak growth. The latest world growth outlook from the world bank shows the weakest prospects in recent history.

Ordinarily, weak growth would cause bond yields to fall as markets anticipate falling interest rates. However, budget deficits are now a much greater concern as weaker growth is perceived as an additional strain on already excessive budget deficits, which may need higher yields to enable financing.

Once again we take a look at the evolving predicament in Japan

This week has seen the yen fall through the Bank of Japan’s last-ditch line at Y152 as bond yields rose strongly. There’s little doubt that the Bank of Japan will have to raise rates and stop monetising debt.

The losses on QE have become incredible. Since the peak of prices in July 2019, the value of the Bank of Japan’s bond holdings has fallen by over Y400 trillion, which is over 400,000 times its paltry equity capital of 100 million yen. It raises the question: will the BOJ need to be recapitalised?

Doubtless, as dollar rates increase  forcing Japanese rates higher its losses will eventually catch the public’s attention. And the plight of Japan’s over 20 times highly leveraged banks will as well, because if the central bank is bust saving the commercial banking system becomes no longer credible and has the potential to collapse the currency.

Alasdair Macleod

Recently, inflation has started to rise in the US again, even as the Fed has started to talk about 2024 rate cuts to its forecast since the end of last year! Once again the Fed looks badly out of tune with its inflation objective, with commodity prices now rising and inflation forecasts turning higher.

Confidence in economic policy competence has once again become a significant issue. Here is a very good perspective on current dynamics.

 

Summary

Looking forward, without any change in the discipline and orientation of policy management of fiat currencies, the whole system has become very challenged and exposed to radical changes in economic conditions.

This was discussed, in this insight a few weeks ago as regards Japan, and what has happened since is an acceleration of that problem. Markets will quickly extrapolate Japan’s issues to other countries if the situation does not improve.

Indeed gold and US Treasuries are already reacting to the possibility of a very different future investment environment, even as asset managers in aggregate are continuing to oppose this possibility.

Best Practice is a matter of your Best Interest.


Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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