Global View What Is Happening to US Safe Assets Part 1 US Treasuries May 2018
What Is Happening to US 'Safe Assets' - Part 1: US TreasuriesThe background of rising Treasury yields and flattening yield curves rarely leads to good economic outcomes. We show, in this report, that the currently flat US yield curve reflects poor domestic liquidity conditions. This, in turn, is leading investors to move deeper into already expensive 'safe' assets, and the resulting skewed distribution of term premia warns of slowing US economic activity over the next 6-12 months. We argue that the skewness of the distribution of term premia is far better at predicting future economic slowdown than the flatness of the yield curve slope. Slower economic activity should ultimately cap the rise in bond yields. We continue to see 3.5% yields on 10-year Treasuries tested this year, but with the growing odds of a bond rally thereafter. The FOMC project seven policy rate rises to end-2020: we foresee, at most, three, largely because US liquidity is already very tight. Fed Funds may reach 2½% and stop.
CrossBorder Capital Ltd (CrossBorder) is a London based, FCA registered, independent investment firm founded in 1996. It is owned by its partners and has no affiliations with banks, stockbrokers or other financial institutions.
CrossBorder's core competence is the measurement and analysis of global liquidity flows. Liquidity is a source of funds, in contrast to money which is a use of funds. It is defined as the flow of cash plus credit, or more explicitly as savings plus the change in base money plus the change in bank credit. Liquidity is therefore a more comprehensive measurement of fund flows than the monetary aggregates used traditionally. Liquidity research is applied to determining the outlook for a range of asset classes including equities, fixed income, currencies and hedge fund styles over varying time horizons.
Central to this analysis is the monthly collection and analysis of balance sheet data from over seventy of the world's central banks to quantify the level and direction of liquidity in each country. This data is publicly available, aggregate as opposed to sample, and rarely significantly revised. It is also little used by investors, and CrossBorder's prime utility is bringing this set of data to investors in a timely and user-friendly way.
CrossBorder's insights rest on two philosophical assertions: first, there is a regular cycle of liquidity, and asset class price movements tend to move sequentially over the cycle. By measuring where we are on it, we can significantly reduce 'fat tail' outcomes in our predictions for asset price movements. Secondly, weightings of asset classes held by investors in aggregate tend to revert to the long term mean. By measuring the variance from this mean, we can understand whether a particular trade is 'crowded' or the reverse.
CrossBorder offers these insights both as the Liquidity Research research service, and in the form of systematically allocated in-house funds. Clients of the Liquidity Research service include leading banks, fund managers (both traditional and hedge) and insurance companies located worldwide. CrossBorder additionally manages and advises on tactical asset allocation products for third parties.
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