Sunday, February 10, 2019
On Friday, I read several recent pieces on domestic and global financial market developments that I thought worth highlighting for readers. Enjoy!
In America faces a battle to find buyers for its bonds, the Financial Times' Gillian Tett notes important buying shifts in the market for U.S. Treasury bonds and the need to think about who “will buy this looming mountain of Treasuries” in the coming years. The Treasury Borrowing Advisory Committee estimates that the U.S. will need to sell $12tn of bonds in the next ten years (an amount greater than in the past decade). China’s holdings of U.S. Treasuries have been declining (from about $1.25tn three years ago to approximately $1.12tn in November 2018), but domestic savers have increased their holdings of U.S. Treasuries (from about $1.9tn in January 2018 to $2.3tn in November 2018). As “the US need for debt is steadily increasing,” Tett’s article invites readers to think about a really critical issue.
Several years ago in my article on The Federal Reserve’s Use of International Swap Lines, I wrote about the Bank of England becoming the first major central bank to establish a central bank swap line with the People’s Bank of China. Today, London’s renminbi trading eclipses pound-euro. As the article notes, the U.K. is “the world’s largest currency dealing hub” with recent daily volumes of about $2.6tn and “Trading volumes in the renminbi against the US dollar were $73bn a day in October…” The U.K.’s proactive approach or “charm offensive” has worked and explains How London won the race for the renminbi. In October 2013, the Federal Reserve established standing central bank swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. With recent increases in renminbi trading volumes, including US dollar-renminbi trades, the global architecture of central bank swap lines arrangements is likely to become increasingly important and worth watching.
Finally, in Private versus public markets is the battle to watch, Robin Wigglesworth focuses on the significant shift in the U.S. of capital from public to private markets (“rarely or never-traded investments…like farmland, real estate, infrastructure, venture capital, direct lending and private equity”) and potential implications of this trend, largely driven by investors’ search for higher returns. In fact, so much capital has “rolled in” to private markets recently, that instead of there being an “illiquidity premium” (an expectation of a greater return because of an investment’s lack of liquidity, which makes exit more difficult) there appears to now be an “illiquidity discount.” This investment trend also has a host of additional, critical implications such as: decreased amounts of capital invested in public markets; increased amounts of capital in less regulated markets; and, the potential for serious financial stability issues because “if there’s a sudden dislocation in markets, a profound dislocation, people who need the money to pay pensions or to pay other obligations are going to have to sell the public stuff quite rapidly.” (Wigglesworth is quoting Mark Machin, chief executive of the Canada Pension Plan Investment Board). Unfortunately, the destabilizing potential of asset fire sales in financial markets is already well-known.