ECB asset purchases: the three transmission channels

September 24, 2016

A new paper suggests that ECB asset purchases influence markets and the economy significantly, mainly through three channels. First, through the asset valuation channel they reduce risk premia and provide capital relief to leveraged institutions, particularly banks. Second, through the signalling channel they enhance the credibility of rates staying low for long. Third, through the re-anchoring channel, asset purchases can reassure the private sector that the central bank remains committed to its long-term inflation target.

(more…)

Mutual fund flows and fire sale risk

September 10, 2016

A new empirical paper looks at the drivers of U.S. mutual funds flows across asset classes. An important finding is that changes of monetary policy expectations towards tightening trigger net outflows from bond funds and net inflows into equity funds. Typically, the costs of redemptions are borne by investors that do not redeem or redeem late. This creates incentives for fire sales and causes of price distortions, particularly if the outlook for monetary policy is revised significantly.

(more…)

The threat from China’s shadow finance

August 27, 2016

In past years China witnessed a boom in shadow finance, particularly in form of entrusted loans. Banks apparently used shadow credit products in large size to circumvent policy restrictions and bank loan regulations. Regulatory tightening has reined in the proliferation of shadow finance since 2014, but outstanding contracts pose serious systemic risk due to the combination of high default risk and dependence on fragile wholesale funding.

(more…)

The world’s negative term premium

August 20, 2016

The term premium on the “world government bond yield” has turned decisively negative, according to BIS research. Investors have since 2014 accepted a long-term yield below expected short-term rates, rather than charging a premium on duration exposure. The compression and inversion of term premia may have been fueled by a global duration carry trade and seems to be a global phenomenon. It has coincided with increased correlation of long-term yields across developed and emerging markets.

(more…)

The side-effects of non-conventional monetary policy

July 30, 2016

A BIS summary of research gives a nice overview on non-conventional monetary policies and their unintended systemic consequences. Current policies appear to yield diminishing returns in terms of easier financial conditions, while their costs and side effects are increasing. This leaves markets more exposed to future negative shocks. Also, the descent into negative nominal interest rates is itself a drag on profitability and health of the financial system that erodes the effectiveness of non-conventional policies.

(more…)

“Helicopter money”: A practical guide for markets

June 11, 2016

If current non-conventional monetary policies fail to contain deflation risk, some form of debt monetization or “helicopter money” will become a policy option. The barriers are high but not insurmountable in the G3. Policies could range from a simple combination of QE and fiscal expansion to outright central bank funding or debt restructuring. If and when monetization of government debt becomes apparent the consequences for financial markets would be profound: the policy response to deflation risk would no longer drive bond yields lower but higher.

(more…)

Climate change and systemic financial risk

May 22, 2016

The rise in global temperatures calls for a lower-carbon economy overtime. This poses systemic financial risk in two ways. First, large fossil-fuel reserves may become unburnable, triggering a collapse in asset valuations and a rise in corporate and sovereign default risk. Second, ecological deterioration may trigger belated and sudden policy adjustments, forcing the financial system to confront large underestimated carbon risk exposure and an economic recession at the same time.

(more…)

Insurance companies and systemic risk

April 23, 2016

The contribution of life insurers to systemic risk has increased, according to the IMF Global Financial Stability Report. They now hold about 12% of global assets and common exposure to aggregate risk has risen. Insurers are vital for key market segments such as corporate bonds and securities lending. Meanwhile, low global interest rates have aggravated duration gaps, increased interest rate sensitivity and may encourage greater risk taking.

(more…)

The rise of EM fiscal risks

April 20, 2016

The latest IMF Fiscal Monitor quantifies the significant deterioration in emerging market government finances. The average deficit-to-GDP ratio in EM is expected to reach 4.7% of GDP this year while the average debt ratio is approaching 48%. The structural deficits of many commodity exporters seem too large to sustain if commodity prices fail to recover. Moreover, dangers from contingent liabilities related to banks and the massive EM corporate debt stock have increased.

(more…)

The “de-anchoring” of inflation in the euro area

April 16, 2016

Two recent empirical studies highlight the risk that inflation expectations in the euro area are becoming de-anchored, similar to Japan. De-anchoring means that short-term price shocks can change long-term expectations. Importantly, the papers suggest medium- and short-term measures to track this de-anchoring. De-anchoring increases the risk of actual deflation and may add to the risk premia on equity and credit.

(more…)

Tags

Tags
asset management Asset Purchase Program banks bond returns bond yields bubbles capital regulation carry China collateral commodities credit returns default ECB economic data EM equity returns euro area crisis Fed financial crisis FX FX interventions FX returns government debt government deficits herding inflation information insurances Japan leverage liquidity machine learning market turmoil price factors regulation risk management shadow banking statistical methods term structure trend following variance risk premium VIX volatility ZLB
ABOUT US

Macrosynergy is a London based macroeconomic research and technology company whose founders have developed and employed macro quantamental investment strategies in liquid, tradable asset classes, across many markets and for a variety of different factors to generate competitive, uncorrelated investment returns for institutional investors for two decades. Our quantitative-fundamental (quantamental) computing system tracks a broad range of real-time macroeconomic trends in developed and emerging countries, transforming them into macro systematic quantamental investment strategies. In June 2020 Macrosynergy and J.P. Morgan started a collaboration to scale the quantamental system and to popularize tradable economics across financial markets.

FOLLOW US
Linkedin
LEGAL
Research
Quantamental Academy
About Us