LONDON, Oct 13 – The market mood of the moment is whether bubbles are being blown in riskier markets by loose fiscal and monetary policies that lift the inflation horizon for years to come. Still compressed yields in gigantic global debt markets may give a glimpse of what’s happening.
With mounting fears for central bank independence from Washington to Tokyo and little appetite anywhere for unpopular budget cutting, the prospect of inflation rates returning sustainably back to long-standing 2% targets has dimmed.
That doesn’t even have to mean another bout of runaway post-pandemic inflation but it could see 3-4% inflation for the world’s major economies start to get baked in. Already core inflation for the G7 economies as a whole is settling at 3%.
That may underpin nominal GDP growth and record high equities – goosing high-octane bets in tech, AI, private markets and even gold in the process. But it’s a sour prospect for already clipped returns in global government and corporate fixed income that still houses the lion’s share investment capital.
Apollo’s chief economist Torsten Slok pointed out late last week that almost 90% of all public fixed income outstanding now trades with a yield of less than 5%. With inflation running at 3%, that leaves a real return of just 2%.
It’s a big universe of relatively meager long-term returns.
According to latest annual data from the Securities Industry and Financial Markets Association, global fixed income outstanding hit $145.1 trillion through last year – up 75% over the past decade and still bigger than the entire global equity market capitalization of $126.7 trillion.
Of course big players in the private credit market like Apollo may have good reason to highlight the dearth of return in public markets – it’s one of the big arguments for channeling investors into the less transparent but typically higher-yielding private credit space.
What’s more, there are a host of reasons why investors hold government and public bonds at large – capital preservation for central banks, sovereign and pension funds, regulatory and liquidity demands for banks and insurers and steady long-term income in mixed portfolios.
But the marginal real return arguments may see more bond capital leak elsewhere if higher inflation is indeed now entrenched.
Even that private credit universe, while growing rapidly, is still only about $2 trillion in total size and the market cap of physical gold is a relatively modest $26 trillion. While tech stock market cap has ballooned over the past 10 years, it’s concentrated in a relatively small number of mega firms.
So relatively small portfolio shifts from the bond universe may have outsize impacts in these areas.
MANAGING IDIOSYNCRACIES
Fixed-income fund managers talk of generating better returns through active management – playing yield curves, spread trades, selective company names and even riskier bets that enhance those returns as long as economic growth holds up.
While not seen as a major worry yet, recent jitters about credit accidents in the private debt world – surrounding the First Brands bust in particular – and creeping high-yield defaults may add headaches.
BlackRock’s credit team, for one, insists some of the jolts in credit are “idiosyncratic”, the peak in recent default activity is likely behind us and it remains positive on corporate credit as interest rates fall and growth continues.
But it’s been hard station for aggregate bond holdings in recent years in any event.
The Bloomberg Multiverse of all global bonds is currently yielding 3.7%, with the government component just 3.2% – leaving the real yield on the latter barely positive. To be sure, that’s marginally better than the negative real yields of much of the past decade, but it’s still two percentage points below levels seen before the credit crash of 2007/2008.
Average annual total returns on that government index over the past decade have been about 0.5%.
Most risk-averse investors who hold these bonds may not be in them for relative yield. But a higher inflation world makes them more uncomfortable as a safety hedge – and even edging away may supercharge everything else.
Oct 1 – The main U.S. stock indexes bounced back from early lows on Wednesday after weaker-than-expected private payrolls data boosted expectations for a central bank rate cut this month, allaying anxiety around the federal government shutdown.
Traders sharply increased bets on a 25-basis-point interest-rate cut from the U.S. Federal Reserve at its next meeting after the ADP National Employment Report showed private payrolls dropped the most in two-and-a-half years in September.
“While the ADP report is a volatile set of data, it may be the only employment data that you have for quite a while,” said Arnim Holzer, global macro strategist at Easterly EAB.
“And today’s relatively negative set of data is probably outside of what the Fed would have liked to have seen.”
At 11:59 a.m. the Dow Jones Industrial Average (.DJI), opens new tab rose 76.92 points, or 0.17%, to 46,474.81, the S&P 500 (.SPX), opens new tab gained 7.49 points, or 0.11%, to 6,695.95, and the Nasdaq Composite (.IXIC), opens new tab added 30.37 points, or 0.13%, to 22,690.38.
Pfizer and U.S. President Donald Trump said on Tuesday they had cut a deal in which the drugmaker agreed to lower prescription drug prices in the Medicaid program – compared to its charges in other developed countries – in exchange for tariff relief.
After trading lower for most of the premarket session on shutdown concerns, investors soon found their footing.
“The market has become a little bit inured to the shutdown drama,” Holzer said.
Markets have historically been resilient during government shutdowns. The S&P 500 rose during each of the last six, according to a note from Deutsche Bank.
However, other analysts warned that a prolonged shutdown could prove a drag. In the seven instances when such shutdowns lasted 10 days or longer, the S&P 500 fell four times and rose thrice, according to Vanguard.
Data from the Institute for Supply Management showed U.S. manufacturing edged toward recovery in September.
Such readings carry added weight now, with government data such as the nonfarm payrolls report that was scheduled for Friday expected to be delayed.
Investors will also parse commentary from Richmond Fed president Thomas Barkin.
Corteva (CTVA.N), opens new tab said it would separate its seed and pesticide businesses into separate publicly traded companies. It was at the bottom of the S&P 500 after its shares fell 7.4%.
Advancing issues outnumbered decliners by a 1.56-to-1 ratio on the NYSE and by a 1.2-to-1 ratio on the Nasdaq.
The S&P 500 posted 28 new 52-week highs and six new lows, while the Nasdaq Composite recorded 88 new highs and 50 new lows.
Sept 17 – What matters in U.S. and global markets today
With a first Federal Reserve, opens new tab interest rate cut of 2025 now considered to be in the bag, world markets are hungry for signals on how much more comes after. This has allowed the dollar to stabilize at four-year lows against the euro ahead of today’s decision.
U.S. stocks also stalled on Tuesday and futures were flat ahead of today’s bell, with Fed rate cut bets now gravitating to exactly 25 basis points after news of roaring 5% annual retail sales growth in August helped put the kibosh on thoughts of a bigger move this week. Gold backed off too. That didn’t stop U.S. long bonds rallying, opens new tab further, however. Helped by brisk demand for 20-year debt at Tuesday’s auction, the 30-year yield hit a 4-1/2 month low of 4.62% ahead of the Fed announcement.
Hong Kong shares closed at their highest level in four years, as the expected Fed cut, weakening dollar and buoyant local technology stocks all helped. Amid signs of returning foreign funds, confidence in China’s artificial intelligence capabilities is rising and U.S. President Donald Trump’s announcement of a deal to keep TikTok operating, opens new tab in America lifted appetite for risk assets. The U.S. and Chinese presidents are due to speak on Friday. By contrast, Nvidia slipped on Tuesday and continued to fall another 1% overnight on reports of weak China demand for a new AI chip and after the Financial Times reported that China’s main regulator told the country’s big tech firms to stop buying all of Nvidia’s AI chips.
The euro surged to a four‑year high against a weakening dollar on Tuesday, but the greenback stabilized somewhat today and the dollar index bounced slightly from two-month lows. However, China’s offshore yuan continues to boom to its strongest level of the year – and the best since the U.S. election. Japan’s yen was at its strongest in a month ahead of Friday’s Bank of Japan decision and the Canadian dollar steadied ahead of Wednesday’s expected quarter point rate cut by the Bank of Canada. Soft Canadian August inflation data on Tuesday underscored BOC easing bets. The Aussie dollar fell back from Tuesday’s one-year high.
With Trump visiting Britain and the Bank of England’s policy decision tomorrow, sterling hovered close to two-month highs against the ailing dollar and UK stocks and gilt prices were firmer. As part of the state visit, Britain and the United States agreed a technology pact to boost ties in AI, quantum computing and civil nuclear energy – and top U.S. firms led by Microsoft pledged 31 billion pounds ($42 billion) in UK investments. BoE easing bets for the rest of this year are off as UK inflation in August held at 3.8% as expected – the highest inflation among major advanced economies.
* Britain and the United States have agreed a technology pact to boost ties in AI, quantum computing and civil nuclear energy. The “Tech Prosperity Deal” is part of U.S. President Donald Trump’s second state visit to Britain, which formally begins on Wednesday.
* President Donald Trump’s renewed push to nix quarterly corporate disclosures, a drive that went nowhere in his first administration, has a better chance this time as the White House takes more control of the Securities and Exchange Commission’s agenda.
* The Trump administration has made it clear that they think Chair Jay Powell’s team has done a poor job with inflation control. Eurizon SLJ asset management CEO Stephen Jen argues that the president may have a point.
* The rush to hedge U.S. equity exposure this year was initially seen as part of a broad ‘de-dollarization’ process. But, writes ROI markets columnist Jamie McGeever, as the months go by and U.S. stocks roar to fresh tech-fueled highs, this theory seems to be crumbling.
Chart of the day
There may be many reasons why the Fed decides to resume policy easing with its first interest rate cut of the year on Wednesday – but the current pace of GDP growth, booming retail sales, the loosest financial conditions in more than three years and inflation still far above target are not among them.
Today’s events to watch
* U.S. August housing starts/permits (8:30 AM EDT)
* Bank of Canada policy decision (9:45 AM EDT) and press conference (10:30 AM EDT)
* U.S. Federal Reserve’s policy decision and updated economic and rate projections (2:00 PM EDT), press conference (2:30 PM EDT)
* European Central Bank President Christine Lagarde speaks
* U.S. President Donald Trump visits Britain
* U.S. corporate earnings: General Mills, Progressive
