Bonds: Total Market
(New York)
The debt clock is reading ten minutes to midnight for Congress which seems gridlocked in a game of chicken that could cost the public. Goldman Sachs issued an internal note late last week that there is a material risk that congress fails to reach a consensus on increasing the debt limit. Mitch McConnell is currently reviewing two plans to present Dems that would allow them to reach a consensus on raising the debt ceiling. Treasury Secretary Yellen reiterated that the government will be cash poor to pay the bills if Congress fails to raise the ceiling. Some are calling for the Treasury to mint a $1 trillion coin in order to finance if Congress doesn’t raise the debt ceiling but Goldman says this scenario is unlikely.
FINSUM: Congress always comes around to raise the debt ceiling, but a new wave of Democrats and Republicans pose new risks that a mutual agreement can be met.
(Washington)
Fed Governor Lael Brainard issued comments on Thursday regarding the Fed’s position on climate change. Brainard said the Fed is developing a series of scenario tools to model the risk of climate change to the financial system. The models will see how our financial system holds up to hypothetical climate change hazards such as floods, droughts, and fires. This will bring the Fed closer to the rest of the leading central banks around the world, such as the ECB and Bank of England, who already are doing this at a minimum. Many progressive Democrats have been critical of the Powell Fed for their lack of green policy and financial regulation and this is a correction step that may allow Powell to get renominated in 2022.
FINSUM: These action steps are important by the Fed, but they will not be accompanied by any regulatory steps, meaning banks won’t be punished for over-exposure to climate risks. Thus, the risk to asset prices seems lower.
Federal Reserve Bank Chairman Jerome Powell spoke last week on a panel hosted by the ECB, and relayed his frustration about the ongoing inflation pressures in the US economy. Powell said the economy’s most important concern is getting people vaccinated and containing Covid’s delta variant. Powell said the key inflationary pressures remain supply chain bottlenecks in the US economy. These supply constraints have the U.S.’s key inflationary measure (core personal consumption expenditure) elevated to its highest level in 30 years. The FOMC has raised their expectation for inflation from 3% to 3.7%, and Powell said this could continue into 2022. Powell’s Analysis was backed up by both Japan and the ECB’s respective leaders.
FINSUM: The supply shock to the economy remains as chip shortages still persist. As long as supply chains remain disrupted the unemployment/GDP and inflationary goals of the Fed will remain in conflict.
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China’s giant real estate group Evergrande Real Estate Group is in hot water. While they may be China’s second-largest real estate holding company, they are the world’s most indebted as their balance sheet carries an excess of $300 billion in liabilities. Despite this, some of the most prominent investment firms such as BlackRock, UBS, and HSBC Holdings have all bought up their debt. Evergrande’s bonds are trading at 25 cents on the dollar. BlackRock, for example, has increased its holdings from 12.2 million units to 43.5 million YTD and is now nearly 1% of its portfolio. Evergrande is taking measures like discounting apartments, parking spaces, or retail property to pay back its debt as notes are beginning to reach their maturity. Many investors are expecting Chinese authorities to step in to accommodate the debt by either rolling it over or taking other measures.
FINSUM: There is certainly safer debt to hold, but many investment firms see Evergrande as a buy and a risk worth taking because it may be too big to fail.
(New York)
Environmental, social, and governance investing is reaching a new market just about every month these days, but ESG blew past a huge one this week. Socially conscious investing capped a quarter of all new debt sales. Between corporations and countries, the ESG movement pushed out $391 billion in new debt this year. Companies like Enel SpA are leading the way in Italy, being pushed by the strong arm of European governments. The goal is to have Europe be a leader in climate change. However, investors are paying a premium to get ahold of the bonds. What many are calling ‘grenium’ is the excess being commanded by these socially conscious investments as practically everyone in the bond market is tracking ESG ratings.
FINSUM: Europe is a leader in the ESG movement, but its bond market might be a bit saturated. Look to the American or even emerging markets to get a piece of socially conscious bond investing.
(New York)
The bond market is in an odd place right now. For the first part of the year, yields jumped on the threat of inflation. Then in the middle of Spring, those fears started to wane and yields started to fall. Other than a quick reversal of direction off a hot June inflation reading, that has been the trend all summer. However, the whole market looks very vulnerable to a change in sentiment. If inflation comes in warm again for July—especially coupled with some very good jobs numbers—the overall economic picture might move back to bullish, which could swing yields rapidly back in the direction they were headed in Q1.
FINSUM: Essentially this market could quickly realized it mispriced the direction of the economy, so there is a lot of risk for advisors and their clients. Nasdaq and Fidelity are having an interesting webinar on how to plan for this risk. Check it out here.