Global View Who Stole Liquidity The Outlook For US Treasuries - September 2018
Who Stole Liquidity? The Outlook For US TreasuriesThis report takes a 'liquidity view' of the US yield curve and rates. Although Global Liquidity growth is tanking at a worryingly rapid rate, bond market flows look to be more in balance. We do not expect the US Treasury yield curve to invert and it is more likely to gently steepen from around current levels. Yield curve movements depend both on term premia (largely via the long-end) and rate expectations (largely via the front-end). Aggressive rate expectations could drop back, but the low prevailing level of policy rates means it is unlikely they can fall by much. More likely is rising term premia from their unusually depressed levels. Two factors driving term premia higher are: (1) growing supply of US debt and (2) diminishing appetite for US assets from foreigners. According to a 'liquidity view', the 'long-end drives the short-end' and not vice versa. This will mean two more Fed policy rate increases. US 10-year bonds are likely to drift modestly higher, trading in a 3-3.5% yield range over the next 12-18 months, with the 10-1 year yield curve inflecting upwards from later this year.
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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