Posts tagged Markets
Do or die for the Reverse Twist story

Investors are beginning to get seriously interested in the idea that the BOJ and the ECB will change the composition of their bond purchases to steepen the yield curve. In effect, this would be the opposite of the Fed’s Operation Twist, which saw QE purchases concentrated on the long-end, chiefly to lower the yield on mortgage-backed securities. I think this story, at least partly, is to blame for the recent nudge higher in global bond yields. But we will know soon enough. This week's BOJ meeting should give us a hint of whether this narrative has any legs. 

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Is the Wall of Worry Becoming Vertical?

The melt-up, and break-out, in the U.S. stock market recently is a classic case of the market once again climbing the wall of worry in a convincing fashion. Political and economic uncertainty has surged. Trump is now real contender, the Brexit limbo persists, Italian banks are on the brink, and Turkey is wobbling. But the mighty S&P 500 has no time for such petty headwinds, as low yields press investors to seek returns in the equity market. We have seen this movie before, and it ends badly eventually, but it could go on for a while. This is especially the case if investors are starting to discount that EU politics are about to get really ugly.

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The Sweet Spot of Zero Leverage Equity?

Global economic momentum is modest at best, equities and bonds are overvalued, and while allocating your funds entirely to gold, cash and shorts is enticing, it isn’t possible for the majority of money managers. What are investors to do then? The ranking of creditors and equity in the capital structure suggest that high grade corporate bonds—and sovereigns—is the optimal allocation. When the goings get tough, the equity is wiped out, but as creditor you are at least assured a recovery on your investment; even if it may be a slim one. This time could be different, however. 

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