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3 shockers from yesterday’s RPI plans

Index-linked markets were sent into a tailspin yesterday as Chancellor Sajid Javid responded to an earlier letter from the UK Statistics Authority (UKSA), which had set out recommendations for the reform of the RPI. The longest-dated linkers (maturing in 2065 and 2068) fell by more than 9% as breakeven rates plummeted.

Javid’s response contained three big shocks for index-linked markets:

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Is China really a currency manipulator?

Last night, the US Treasury designated China as a currency manipulator. This has occurred a few times in the past, most recently in 1994. Though China has been on the Treasury’s watch list for some time (alongside several other countries), given that the most recent Treasury report published in May did not name China a manipulator, it begs the question, what has changed between then and now?

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Why the fresh US sanctions on Russia are unlikely to cause a meltdown

Late on Friday night, the US announced a fresh round of sanctions against Russia, effective from the 26th August. These restrictions represent the 2nd round of sanctions in line with the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (CBW Act). The announced sanctions include US opposition to the financial or technical assistance to Russia provided by international…

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The moon landing, the Fed and a “pro-bubble”

Economists usually think of “bubbles” as being negative for economies and societies. Think of the US housing bubble and its role in the 2008 Global Financial Crisis as a great example. Defining a bubble is tricky, and often its causes are difficult to explain even with the benefit of hindsight. In their paper “Bubbles in Society – the Example of the Apollo Program” Gisler & Sornette say that…

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The Case for People’s Quantitative Easing by Frances Coppola. An interview and a competition

A decade on from the Global Financial Crisis after multiple rounds of QE across the developed economies, we are stuck with mediocre growth rates, the anticipation of renewed policy easing and the prospect of yet more bond buying from the ECB.

Yet much of the academic research into the impact of QE suggests there are diminishing returns from successive bouts of bond purchasing. It also seems…

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Beware the widow-maker

Over my 25 years in bond markets, there’s always been one trade that becomes known as “The Widow-Maker”. Being underweight long-dated gilts was one, at a time when new pension regulations sent yields plummeting, and shorting the Japanese bond market also became deadly as the Bank of Japan slashed rates to zero. Today, widows and widowers are being made in the German bund market. Yields on the …

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What if the ECB starts buying corporate bonds again?

In his distinctively dovish Sintra speech two weeks ago Mario Draghi left the door wide open for further loosening of monetary policy in the Euro area. All options seem to be on the table to bolster European inflation numbers, including a new round of quantitative easing. Draghi’s remark about the ECB’s Asset Purchase Programme (APP) still having considerable headroom fuelled hopes amongst ma…

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Would demutualising Germany’s Sparkassen (savings banks) kick-start consumption growth and give the eurozone a boost?

This week the 10-year German bund yield hit a new record low of -0.33% in the wake of Draghi’s Sintra speech which had echoes of his 2012 “whatever it takes” declaration. Why so dovish? Manufacturing data from the eurozone has been universally bad lately, and inflation expectations are collapsing. The core inflation rate is now just 0.8% and the ECB’s 2% target looks an impossible goal. The mar…

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The changing nature of market liquidity – understanding banks’ corporate bond inventory

When looking at the risk premium embedded in the extra return you receive in owning corporate debt versus “risk free” governments, one of the factors that we have to take into account is the less liquid nature of corporate bonds. This adds to the potential risk premium from a liquidity and transaction cost perspective. A constant theme since the financial crisis has been the belief that the cra…

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Eskom, Pemex: two distinct stories but a similar root of problem

Fully government-owned corporate bond issuers (or quasi sovereigns) are one of the most interesting areas of emerging market debt investing, due to the hybrid nature of their credit risk: partly corporate credit, partly sovereign risk. Venezuela’s national oil company PDVSA is an example of what can go wrong, as it is in default. Bond investors are therefore currently spending more time looking…

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