Several Fed presidents, and “Big Ben” Bernanke himself, have been spending the last week or so trying to convince markets that their program of quantitative easing isn’t on the immediate chopping block and that any eventual tapering would be contingent on continued economic improvement. They’ve tried speeches, press conferences…maybe it’s time for a novelty song, sung to soothe markets back toward normality?
With the recent increases in U.S. Treasury bond yields, some are decrying the situation as a disaster-in-the-making for Asian economies; however, we don’t subscribe to that view completely. While the levels of yields are indeed important, they’re only part of the picture; the pace at which yields change is also a critical factor. A gradual increase in the yields to 3% (the point at which we’ll cross the Rubicon, according to several commentators) wouldn’t spark a crisis for economies that have benefited from capital flows over the last few years – in effect, it would imply a further 50 basis point (bps) move higher in U.S. Treasurys from current levels, which isn’t necessarily a huge change.
The whole issue revolves around something called the “carry trade.” In its simplest form, that’s when you borrow money in a place with low interest rates, and invest that money in a place with higher interest rates in an attempt to capture the spread, or the difference between the rate levels. The worry is that with the yield differential between Treasurys and Asian government bonds diminishing, investors will abandon Asia and pile into the U.S. Read more
You may have noticed over the past several weeks that in addition to the great economic insights posts here on the Institutional Investor section of The Principal Blog, there have been some guest contributors. Several investment professionals from Principal Global Fixed Income have been writing posts that delve into their areas of expertise. You’ve seen posts on managing volatility and tail risk from Derek White, the head of risk management. You’ve read about bank loan strategies from Mark Cernicky, product specialist. You’ve learned about yields on Japanese government bonds from our global strategist, Seema Shah. And you’ve read about 10 concrete concepts to researching high yield from Phelps Hoyt, our head of high yield research.
I’m delighted to announce that because of the positive response we’ve received on the fixed income blog posts, we’ll be expanding our Institutional Investor section to include regular posts from the fixed income team! Read more
Did you know that Missouri is the only state that’s home to two Federal Reserve banks? There’s one in St. Louis and there’s one in Kansas City, Missouri over on the western edge. And while KC and St. Louis are only about four hours apart by car, on the surface, their respective Fed presidents seem to be poles apart on the issue of “the Taper.” (Caps because I think “Taper” is the new buzzword – this year’s “Fiscal Cliff.”) Read more
The debt crisis is forcing investors of all stripes to reassess their goals, according to the 2013 Principal Global Investors/CREATE-Research report entitled Investing in a Debt-Fuelled World. The report reveals that high returns are no longer the be-all and end-all of investment goals. Investors will increasingly distinguish between “product alpha” and “solutions alpha.” The first is about beating the markets and the second about meeting investors’ predefined needs.
This shift from wants to needs will be the most enduring legacy of the 2008 crash. It will also remain the key driver of innovation over the rest of this decade, as ageing populations ensure that 75% of retail assets are held by retirees or near-retirees over the next five years. Hence, new asset-allocation and risk-management tools will continue to emerge in three core investor segments:
The 2013 Principal Global Investors/CREATE-Research report is due to be launched on June 17th. Each year, a survey focus is chosen after canvassing the views of thought leaders in the investment value chain worldwide. The research topic selected for 2013 is investing in today’s debt-fuelled world. The resulting research report, Investing in a Debt Fuelled World, takes a look at what it means to be an investor in a world where many major economies are trying to cut their debt mountains mostly via a combination of low interest rates and inflation. Read more
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