Revival of bonds as buffer for market shocks

After a steep sell-off, the protection that Treasuries offers investors is back again

Katie Martin 

Bond yields remain too feeble for some, but for others they are now high enough to cushion mixed portfolios against a range of risks © FT montage; AP/NYSE

The recent run-up in government bond yields is a gift to any fund manager fretting over market risks ranging from geopolitics to leverage.

It is true that the first quarter of this year was no fun for holders of government bonds, which dropped in price on the largest scale in four decades. 

But bond bulls took one for the team.

The pullback means that, just as Russia and the US once again lock horns, and as the Archegos implosion stirs concerns over potentially systemic risks stemming from plentiful global leverage, government bonds again offer something of a safety net

Led by the US rates market, the biggest in the world and a foundation for global asset prices, bonds tumbled in the opening months of 2021, spooked by the chance of higher inflation as the global economy emerges from pandemic lockdowns.

Bondholders took fright at the notion that supersized fiscal stimulus packages, particularly in the US, might generate a sufficiently rapid rise in consumer prices that bonds’ fixed regular returns appear to shrink or even that central banks might signal an intention to tap the brakes on their essential monetary support — truly, the stuff of investors’ nightmares.

Global stock indices remain at or close to record highs and, without a bizarre change of heart from central banks, they appear destined to keep pushing higher

For some fund managers, yields remain too feeble. 

But for others, they are now high enough to cushion mixed portfolios against a range of risks, and to act as a shock absorber that has helped to produce a respite from volatility.

At the longer end of the maturity spectrum, US 30-year debt now yields about 2.3 per cent. 

That is towards the lower end of the range that has prevailed for most of the past decade. 

But compared with the collapse to 0.7 per cent in the darkest days of the coronavirus crisis of 2020, and the 1.3 per cent area it held for most of the year, it is positively lavish.

This provides investors with a super-safe asset that they can use to balance out risks in other areas. 

Eric Lonergan, a macro hedge fund manager at M&G Investments, said he has been adding US 30-year debt to his portfolio, as it now offered “room for diversification".

“You don’t care about diversification when things are going right,” he said. 

“You care when something goes wrong. 

Right now I have a high degree of confidence that if that happens, Treasuries will do well. 

It’s insurance against anything . . . except much higher US inflation.”

Global stock indices remain at or close to record highs and, without a bizarre change of heart from central banks, they appear destined to keep pushing higher. 

But geopolitics — including stand-offs between Russia and Ukraine, and China and Taiwan — or acts of God like natural disasters, can always flare up and spark a rush into safe retreats that will rise in price when the going gets tough.

But it is not only acts of God and of politicians that are playing on investors’ minds. 

Some also point to the recent blow-up of family office Archegos Capital Management as a sign that markets are littered with unstable excesses.

Bill Hwang’s Archegos misfired in large part because of leverage. 

His bets were overly concentrated, leaving him stranded when one stock tumbled. 

But the incident hit harder because the bets were supercharged with borrowing. 

The rampant use of total return swaps, which allow users to bet on a share price without owning the shares outright, meant he was in effect renting investment banks’ balance sheets on an eye-popping scale.

Considered alongside the surge in trading by inexperienced amateurs in January — sometimes, again, using leverage, albeit on a much smaller individual scale — and the relentless frenzy for cryptocurrencies and even digital art, it is easy to build a case that the ocean of cash sloshing around the global system could easily, and unexpectedly, capsize some ships.

“We should not underestimate how, in an increasingly interconnected global financial system, ‘stuff happens’,” wrote Steven Major, chief bonds analyst at HSBC and one of the most strident voices in favour of continued investor demand for bonds. 

“There is far too much leverage in the system, much of which may not be visible until something happens. 

And when these shocks come, money flows to the safest of safe havens, US government bonds invariably being the first choice.”

That may be overly gloomy. 

Bonds specialists, after all, thrive on doom — it is their job to think of things that can go wrong. 

And a rethink on leverage is already under way among banks and regulators. 

Still, it is not hard to imagine leverage gaining traction as a pressing global concern, and bond markets picking up the slack. 


Peru ponders: whose fish are they anyway?

A bid to protect part of the Pacific raises legal conundrums

At 7.30am one February morning last year, the great Bay of Paracas shimmered in the light from the desert. 

Storms of seabirds—small Inca terns and petrels, large cormorants and Peruvian boobies—swirled over the shore, retreating like a mirage on approach. 

Flamingos flew javelin-straight. 

Pelicans bobbed on the water, so ungainly that they seem designed by a committee until they took flight, elegantly skimming the waves.

All take advantage of a food chain centred on great shoals of anchoveta (Pacific anchovies), which in turn feed on the nutrient-rich plankton provided by the upwelling of the cold Humboldt current along much of Peru’s coastline of 2,500km (1,600 miles). 

These riches have given the country one of the world’s great fisheries, the third-biggest after China and Indonesia. 

Exports of fishmeal, oil and frozen and canned fish are worth around $3bn a year. 

All told, the fishing industry supports around 700,000 jobs. 

And fresh fish and seafood are at the heart of Peruvian cuisine, one of the world’s tastiest.

Peru has many problems at the moment. 

The pandemic has hit it hard. 

It is suffering political instability that a presidential run-off election next month is unlikely to resolve. 

But sustainably managing the country’s marine resources is a vital medium-term task. 

It is also a matter of current dispute.

Last month the government of Francisco Sagasti, the president since November, published a draft decree to establish a marine reserve, known as the Nazca Ridge. 

It would cover an area of the Pacific about the size of Latvia 100km offshore that contains a submerged mountain range up to 4kms down. 

This undersea massif is a refuge for endangered species, such as the loggerhead turtle, sharks, orcas and the blue whale, as well as yellowfin tuna and swordfish.

Environmentalists have pushed for this for years. 

Peru has been a pioneer in managing the anchoveta fishery. 

In 2009 it introduced a transferable quota system. 

The marine research institute fixes the total catch and monitors boats closely. 

The stock has remained roughly constant. 

But the country has been a laggard in creating marine protected areas. 

Under the international Convention on Biological Diversity, it signed up to a target of protecting 10% of its seas by 2020. 

But so far it has only designated four small coastal reserves (Paracas, the first, dates from 1975). 

That contrasts with a regional average in Latin America of almost a quarter.

The Nazca Ridge covers 7.3% of Peruvian waters. 

Both environmentalists and the fishing industry back it in principle. 

But a big row has broken out over the details. 

Article 5 of the draft decree separates the reserve vertically into two zones. 

It would allow commercial fishing for the first kilometre below the surface and ban it below that, with one exception: a single family with six boats would be allowed to continue deep-sea long-lining for Patagonian toothfish, as that family has done for a dozen years. 

The fishing industry has pushed for Article 5. 

“It’s important that the specifics are set out and not left open to interpretation,” says Cayetana Aljovín of the National Fisheries Society.

For some environmentalists Article 5 pre-empts a scientific discussion about the management of the reserve. 

For others it undermines the whole point of it. 

“It’s a power battle for the fishing industry,” says Patricia Majluf of the Peruvian branch of Oceana, an ngo. 

“They think Peruvian waters are theirs and they manage everything perfectly.” 

International experience shows that banning all fishing in an area leads stocks to regenerate and quickly increases catches nearby. 

And enforcement is easier if all boats are prohibited.

The problem is that Peruvian law recognises prior rights, even in protected areas. 

Officials are worried that a total ban would be legally unenforceable. 

“You have to allow a very small amount of activity to protect a very large area,” says a senior official. 

He says the government will try to prevent the toothfishing family from transferring their permit to any other fishermen.

Mr Sagasti’s government has done a creditable job of trying to mitigate the pandemic and organise vaccinations. 

But it is only a caretaker. 

An imperfect reserve may be the most it can manage before it leaves office on July 28th. 

Yet the issues at stake will surely recur. 

According to some scientists, climate change is likely to lead to fewer anchoveta. 

Peru should find a way to organise watertight reserves. 

Private property rights cannot be as absolute over the fish in the sea as they are on land.

US Money Supply: More Lies from On High

By Matthew Piepenburg

Upton Sinclair famously observed that, “it is difficult to get a man to understand something, when his salary depends on his not understanding it.”

After decades navigating among Wall Street sell-siders or reading the pablum that passes for financial journalism in the retail space, I discovered it was always an open secret in the big banks that if you wanted to move up the ladder, don’t rock the boat.

In short: Keep the message bullish, as bears get fired and bulls stay hired.

Such Realpolitik is nothing new; employees, be they working for the New York Times, the Federal Reserve or Goldman Sachs, have a vested interest in staying employed.

This by no means makes self-preserving realists cowards, but it certainly doesn’t make such professionals helpful fiduciaries to those trying to make sense of that oh-so elusive chimera otherwise known as blunt facts and hard truths.

In the halls of financial power, and by extension financial messaging, such self-preservation often entails a bit of open dishonesty, which frequently takes the form of concealing rather than just misreporting the facts.

As the expressions goes: “A man does not sin by commission only, but often by omission.”

The U.S. Fed, like the vast majority of central bankers, has a long history of messaging fantasy over reality in the name of self-preservation and/or maintaining “market order.”

Their most effective lies are typically characterized not just by what they say overtly, but in what they conceal covertly.

Lies of Distortion

The open Charade, for example, of low inflation fictionally published under the U.S. CPI scale is a classic example of omitting certain facts in order to derive at a comforting fiction. We’ve written at length on this topic dishonest inflation reporting.

Such clever distortions of reality are not mere exceptions to Fed reporting and/or Fed speak, but a way of life for policy makers with an Orwellian capacity to be “ministers of truth” despite hiding it from the masses on a daily basis.

Lies of Omission

As for hiding facts, perhaps you’ve noticed something which the main stream media has largely overlooked, namely that the Fed recently decided to suspend the weekly reporting of the M1 and M2 data which typically came out every Thursday at 4:30 PM.

And if you want to know why, the answer is as simple as it is predictable: When policy makers don’t like the facts, they just bury them.

Like a child seeking to hide a bad report card from his parents, the Fed likes to hide bad news from the masses.

Take, for example, the following graph of the rise in the M1 supply, which tracks the level of current hard cash notes, coins, paper money and checking account deposits.

As of April 2021, the M1 supply has gone from $4.5T to $18.1, a rise of 450%

Needless to say, such data represents a pretty bad report card for the Fed’s failed monetary experiment of unlimited QE.

Staggering M1 data like this has many embarrassing and undeniable implications regarding inflationary risk, currency risk, social risk and hence political risk.

The Fed’s solution to the problem? Hide it.

We see the same suspension of weekly M2 data, which comprises the M1 money supply plus the amount of dollars in saving accounts, mutual funds and money market securities. 

As the graph below confirms, the M2 levels have recently surged by 30% from $15T to just under $20T:

Given that such a dramatic money supply rise points directly to the consequences of extreme money creation which leads to extreme inflation (which, after all, is defined by money supply) and hence extreme currency debasement, the Fed naturally chose to discontinue such weekly reporting of the same.

A Foundation of Lies

Again, such lies of omission are nothing new for a private bank whose very name “Federal Reserve” is itself an open lie, as is the irony of it being headquartered on Constitution Ave., despite our founding father’s clear and Jeffersonian intent to never allow such a bank within our Constitution…

The Same Ol’ Same Ol’

Be reminded, for example, that as the U.S. was marching straight into the Great Financial Crisis of 2008, (unleashed by Fed Chairman Alan Greenspan’s pre-08 rate cuts), an embarrassed yet truth-challenged Fed decided to fully discontinue M3 reporting in 2006.

In short, we see a familiar pattern: When the data is bad, hide it.

M3 money supply was the measure of M2 money supply plus institutional money market funds, larger deposits and larger liquid assets.

It too was a screaming indicator of trouble ahead, and thus the Fed simply chose to cancel the truth; M3 reporting by the Fed vanished and has never come back.

Cancelling truths, alas, appears to have become a national pastime in a country where even Dr. Seuss is a cultural threat…

The sad truth, however, for those who are willing to report, share and face it, is no great mystery: Grotesque elevations in the money supply mathematically destroys the purchasing power of the underlying currency.

And as for grotesque levels of money printing, just use your own two eyes—The Fed, along with all the major central banks, are trigger happy money printers, and as such are killing all the major currencies with the same QE bullet:

The trillions of U.S. dollars created out of thin air in 2020, as well as the trillions which preceded this printing-frenzy between 2009-2014 (QE1-QE4), have dire consequences on the purchasing power of America’s once sacred but now totally inflated, and hence debased, currency.

By debasing the dollar in your checking account, wallet or portfolio report, this private bank otherwise cleverly labeled as the Federal Reserve is literally stealing money from you by the second, which, of course, is good reason for them to hide the evidence (M1, M2 and M3) of their crime.

Anyone who took a basic econ class in college, for example, knows that exaggerated growth in the money supply is a currency killer.

But apparently the very chairman of our Federal Reserve at the inception of “QE gone wild” must have skipped that class.

At the opening chapters of what is now a money printing nightmare on auto-pilot, former Fed Chairman Ben Bernanke made two promises and two lies in the same breath.

First, he said the money printing that began in 2009 would only be temporary; second, he promised it would be “at no cost” to the overall strength of our economy.

But as the following graph of the declining US dollar confirmed (while Mr. Bernanke was still in office and preparing for a self-congratulatory book tour), our Fed Chairman was lying.

There was a cost:

But such lies from on high are no surprise to anyone who can fog a mirror and read a graph at the same time.

Furthermore, the many examples of Fed leaders speaking out of both sides of their mouths (as circumstances demanded) are as disturbing as they are comical. Below are just a few additional highlights:

“You will never see another financial crisis in your lifetime.”

-Janet Yellen, spring 2018

“I do worry that we could have another financial crisis. ″

-Janet Yellen, fall 2018

“There’s no reason to think this (bullish) cycle can’t continue for quite some time, effectively indefinitely.”

-Jerome Powell –2018

“The US is on an unsustainable fiscal path; there’s no hiding from it.”

-Jerome Powell–2019

With the foregoing facts before you, are you still struggling with trusting the Fed? 

Do you still think their 0 in 10 record for properly forecasting and avoiding recessions is grounds for confidence?

Do you still think the Fed has your back as risk assets rise to bubble levels never seen before in the history of capital markets?

Do you still think this private bank masquerading as a public office and public servant is indeed serving the ever-debasing dollar in your pocket?

Think again.

Biden’s Climate Opportunity in Latin America

As Latin America inches toward a post-pandemic recovery, it is vital that the region’s governments align their rebuilding strategies with their commitments under the 2015 Paris climate agreement. The United States could help make that happen.

Guy Edwards, Benjamin N. Gedan

WASHINGTON, DC – Relations between the United States and much of Latin America are recovering after hitting rock bottom under former US President Donald Trump. 

But while President Joe Biden’s administration is focusing on the Central American migration crisis, it must not miss the opportunity to drive urgently needed climate action to help the region rebuild after the pandemic.

Given the scale of Latin America’s economic collapse in 2020 – its 7.4% GDP contraction was the worst of any region – most of its national leaders did not dwell much on climate change. 

Argentina, Mexico, and Peru have yet to direct a single dollar of recovery spending toward reducing greenhouse-gas (GHG) emissions and air pollution, according to the Oxford University Economic Recovery Project. Instead, vast sums have gone to the region’s fossil-fuel industries.

Today, as Latin America inches toward recovery, it is vital that the region’s governments align their rebuilding strategies with their commitments under the 2015 Paris climate agreement. 

The US could help make that happen.

To limit global warming this century to below 1.5 degrees Celsius relative to pre-industrial levels, Latin American countries, along with the rest of the world, must halve GHG emissions by 2030 and achieve net-zero emissions by 2050. 

While this is a tall order, we have most of the necessary technology. 

The region’s ample renewable energy sources, together with electrification of transport, could largely replace reliance on fossil fuels, which accounted for most of Latin America’s GHG emissions in 2018. 

Such a transition would reduce air pollution and attract the investment needed to help reverse a surge in joblessness and poverty over the past year.

Latin America’s renewables sector is already growing rapidly, and accelerating the green transition would drive economic recovery. 

Economists say that by 2030, the region could attract $432 billion in renewable-energy investments, excluding hydropower, and thus save billions on oil and gas imports and health-care spending related to dirty air.

But aligning Latin America’s energy sector with the Paris climate agreement’s goals will be difficult without US support. 

Private and state-owned energy companies committed to oil and gas production remain influential, as the large share of stimulus spending allocated to them in Argentina, Colombia, and Mexico makes clear. 

By contrast, tight national budgets include little money for electric buses or charging stations to encourage widespread electric-vehicle adoption.

By emphasizing renewable energy in Latin America, the US could dramatically alter the region’s energy posture. 

And regional leaders recognize that cooperation on climate change is a good way to strengthen ties with Biden’s administration. 

Presidents Alberto Fernández of Argentina and Iván Duque of Colombia, and Chilean environment minister Carolina Schmidt, have already spoken with Biden’s Special Presidential Envoy for Climate, John Kerry.

Unlike in the US, climate change is not a partisan issue in Latin America, where polls show that 90% of citizens regard it as a serious threat. 

The 2019 United Nations climate change conference, COP25, took place under the auspices of the Chilean government, and several countries from the region met the December 2020 deadline to update their emissions-reduction pledges under the Paris agreement.

Biden’s April 22-23 Leaders Summit on Climate will be an opportunity to highlight the climate policies of Barbados, Chile, Colombia, Costa Rica, and Jamaica. 

At the same time, Biden can nudge the region’s biggest GHG emitters, Brazil, Mexico, and Argentina, to do more to align their recovery plans with the Paris goals and avoid further fossil-fuel bailouts.

Biden could also use the summit to articulate how the US will phase out both domestic fossil-fuel subsidies and its financing of fossil-fuel production abroad. 

In recognition of the social and economic  costs of this transition, he could offer a range of incentives to invest in renewables, including a significant increase in renewables funding from the US Export-Import Bank and the International Development Finance Corporation (DFC). 

These investments would complement similar lending by the Inter-American Development Bank.

By boosting renewable energy in Latin America, the US could expand its participation in one of the world’s most dynamic sectors. 

The DFC currently ranks fifth in renewable energy financing in Latin America, behind Spain’s Banco Santander and the German development bank KfW. 

Italy’s Enel, the United Kingdom’s Actis, and Brazil’s Omega are the biggest wind and solar operators in the region, with the US-based AES in seventh place. 

China is the region’s dominant supplier of solar technology, and the two biggest suppliers of wind turbines are European, far ahead of third-place General Electric.

The Biden administration recognizes this opportunity. 

In executive orders, Biden has identified the fight against climate change as an essential component of US foreign policy and national security, and pledged international collaboration to drive capital toward clean energy and away from fossil fuels, particularly in developing countries.

For Latin America, there is no time to lose. 

So far, Biden’s regional policy has been understandably dominated by the chaos at the US border with Mexico – a crisis that originates in El Salvador, Guatemala, and Honduras. 

The US must now broaden its approach to this critical region, and capitalize on the goodwill that Biden has built up there during his career. 

Encouragingly, two senior US administration officials recently visited South America with climate and environmental issues reportedly among the key topics of discussion.

Without the support of leading allies like the US, Latin America will struggle to advance a clean energy transition, especially if it focuses on propping up its oil and gas industries in an attempt to rebound from the pandemic. 

Alternatively, US incentives and diplomatic engagement could accelerate a green transformation that offers both Latin America and the US enormous social and economic opportunities.

Guy Edwards, a former senior consultant at the Inter-American Development Bank and former co-director of the Climate and Development Lab at Brown University, is co-author of A Fragmented Continent: Latin America and the Global Politics of Climate Change.

Benjamin N. Gedan, a former South America director on the US National Security Council, is Deputy Director of the Wilson Center’s Latin American Program and an adjunct professor at Johns Hopkins University.