Inflation has been a point of contention as of late, as central banks are signaling it’s driven by the supply side constraints, and others are believing this is driven by the central bank practices themselves. Goldman Sachs chimed in saying they see 2021Q4 inflation number at 4.3% but that trailing off to 2.15% by 2022. The higher inflation in the intermediate means that the economy is at a significant risk of a right hike in early 2022. Sachs places themselves on the supply side of the debate however as semiconductor manufacturing picking up and increased imports in furniture and other consumer goods will drive down prices. On the opposite end of the spectrum, Jack Dorsey took to his own platform twitter to warn of hyper-inflation which sparked its fair share of social media controversy.

FINSUM: Inflation expectations are running pretty high historically, but surveys are really a poor metric, the TIPS market for example is predicting much more stable inflation.

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The fixed income market is in some of the worst shapes in recent memory. Both government and corporate debt have lost a 15 year high of 4.4% this year. Regardless if inflation is being driven by central banks and trillion-dollar stimulus or the supply chain disruptions Powell is claiming the bottom line is inflation is eating at the ‘fixed income’ bond investors have relied on. The U.K., Euro area, and Japan haven’t exactly been a shelter dropping 7.5%, 8%, and 9.8% respectively. On top of all of this, the Fed and other central banks are tightening, eroding the value of existing bonds. There has been shelter if investors are willing to look to emerging markets, such as China but overall investors need to be more flexible and can’t rely on index bond investing to survive.

FINSUM: High-yield corporate debt is where investors are going to have to look domestically to get the return after inflation they are used to.

(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.


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.

(New York)

Investors in India have by in large part stayed away from their own high yield corporate bonds, but wary investors from China have done the opposite. India’s high yield bond issuers set a $9 billion-dollar record from international investors which tripled last year’s inflows. Many of these investors are coming from China, specifically Evergrande, whose liabilities alone double India’s entire corporate debt market. Many investors are worried that other sectors in China’s economy may come to suffer from Xi Jinping’s ‘common prosperity’. In the meantime, there are still risks to India’s debt, most notably energy prices, as India imports most of its energy. Higher energy prices increase input costs, which could cut margins.

FINSUM: Developing countries outside China are all receiving inflows in corporate and non-corporate debt investments with China’s turmoil.

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.

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.

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