Bond investors and central banks

This is an audio transcript of the FT News Briefing podcast episode: Bond investors and central banks

Marc Filippino
Good morning from the Financial Times. Today is Friday, November 5th, and this is your FT News Briefing.

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Opec isn’t caving in to White House pressure to boost oil production, and SoftBank is facing investor pressure to buy back shares. Plus, central bankers’ relationship with the bond market, well, it’s become complicated.

Katie Martin
The market has got used to being spoon-fed by central bankers, particularly since the financial crisis of 2008. The situation that we find ourselves in now is that inflation is really hard to understand.

Marc Filippino
We’ll talk more about that with our markets editor Katie Martin. I’m Marc Filippino, and here’s the news you need to start your day.

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The White House yesterday said Opec and its oil-producing allies could imperil the global economic recovery by refusing to speed up production. The US also said it was prepared to use all tools necessary to lower fuel prices. The implication is that the US could release supplies from its government reserves and bring crude oil prices dropped as much as 1.8 per cent in response. The FT’s US energy editor Derek Brower has more.

Derek Brower
Opec is increasing production; it’s increasing production by 400,000 barrels a day. What the US wanted it to do was increase the volume every month. It didn’t do that. So the market is looking at both the prospect of more oil coming from Opec, and so that is in a way bearish if you believe that Opec is doing enough to cool prices by increasing by 400,000 barrels a day as planned. But they are also considering what the US might do in reaction to Opec not increasing supply as quickly as the White House wanted, and this is why it’s complex. So the US has told us that it has considered releasing stored strategic stocks of its own from its huge stockpile, called the Strategic Petroleum Reserve, that would knock prices back a bit. The US also has an even bigger tool that it can deploy, which is to get Iran to produce more oil on the way to do that, and that would take a bit longer, but the way to do that is to strike another nuclear deal with Iran, and those talks will resume later this month.

Marc Filippino
Derek also says this energy crisis is a boon for fossil fuel producers.

Derek Brower
It’s just a very, very good time to be a producer of natural gas or a producer of oil because consumers want more and more of them, and supply is not keeping up with the thirst for those two fossil fuels. Ironically enough, given that, you know, the rest of the world leaders gathering in Glasgow to try to curb the use of those fossil fuels, the thirst for them is going up. And so it’s a very good time if you sell either of those products and rush out and sell both up speed. So it’s sitting very pretty at the moment.

Marc Filippino
Derek Brower is the FT’s US energy editor.

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Japan’s tech investment giant SoftBank has watched its shares sink this year. Its stock price is down 42 per cent from its peak in March. Now, frustrated investors like activist hedge fund Elliott Management say the only short-term spark for the sagging share price is a capital return programme. In other words, share buybacks. Buybacks are the opposite of founder Masayoshi Son’s philosophy. He prefers to pour money into early stage start-ups, but share buybacks are hardly off the table. Last year, SoftBank began buying back $23bn worth of shares, and stock price rose almost 300 per cent. SoftBank is set to report its quarterly earnings on Monday.

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There was a powerful rally on global bond markets yesterday. Investors had expected the Bank of England to tighten monetary policy, but the BOE startled markets by keeping rates steady. There was a rush to buy government debt and the rally ensued. The Federal Reserve, on the other hand, did exactly what it said it was going to do. On Wednesday, it finally announced it was going to move forward with a pullback of its pandemic stimulus. Markets didn’t flinch. Now all of this got us thinking about how central banks communicate with investors, and how much investors influence central bankers. Talk more about this. I’m joined by our markets editor Katie Martin.

Marc Filippino
Hi Katie.

Katie Martin
Hey, how are you doing?

Marc Filippino
I’m doing well. So, Katie, we talk a lot about central bankers and, you know, the FT’s capital markets correspondent Tommy Stubbington actually had a really interesting piece about how investors had been influencing actions by central banks to push up rates and tighten monetary policy. You know, where and why has this happened?

Katie Martin
It’s an interesting question, and I think for whatever reason, over the past few years and decades, really, the market has got used to being spoon fed by central bankers, you know, particularly since the financial crisis of 2008. Central bankers have basically run the bond market. And so investors have become accustomed to being told by them with a fair degree of accuracy what’s going to happen next? The situation that we find ourselves in now is that inflation, which most central banks target, is really hard to understand and really hard to predict, and there are no textbooks for what’s going on now with inflation as the global economy comes out of the pandemic. And so for some central banks, communication is slightly all over the place, and sometimes the market will say we think we know best. So, for example, quite recently, the market took on Australian government bonds and pushed yields up like really forcefully. So that means the price the bonds is coming down, and that absolutely blasted through the target level that the central bank in Australia had for where these bonds should be trading. And eventually the central bank came around to the market’s way of thinking and said, You know what? Inflation is where it is. It’s time for us to take off some of the stimulus that we’ve had out there. And so this is a very complicated relationship right now, and what we’ve seen in the past few days is that it can break down quite dramatically.

Marc Filippino
Yeah. And you know, it is a case-by-case basis. We talked about this last week in the wake of the European Central Bank meeting, where Christine Lagarde said, hey, you know, I don’t work for investors, I work for the bloc’s economy.

Katie Martin
Right!

Marc Filippino
And they they they blatantly shrug off investors because they think that they know better when it comes to what’s going to happen with inflation. You know, can you talk about why that is the case? You know, why they might shrug off investor pressure?

Katie Martin
You’re right. A lot of investors, particularly in bond funds, kind of feel like they have some sort of right to know exactly what’s going to happen next. That’s really not, generally speaking, central bankers’ job that they are to do something slightly different. But this symbiosis kicks in because if the market feels like central banks are acting too slowly to tackle inflation, then they can tackle inflation themselves effectively through through the bond market. The sort of pilot market parlance for it is tightening financial conditions, so make it more expensive to borrow, make it more, you know, make it more difficult for the banks to lend money effectively by pushing up borrowing costs even when benchmark interest rates aren’t moving. And so central banks don’t generally like market interest rates to be too far away from what they’re trying to achieve. So there is a bit of give and take here, but it is just incredibly difficult for central banks to talk about the range of potential outcomes with inflation at the moment, without market participants feeling like they’ve been led up the garden path into thinking this is what the central bank is going to do next, and this is what we’ve seen a bit of in the past few days.

Marc Filippino
Now, how much should investor expectations drive central bank policy?

Katie Martin
Generally speaking, central banks quite like surprising markets by being more dovish, giving more stimulus than the market had expected. So bad things happen like like the pandemic and central bank say, here, have whatever it takes. So they like being extremely generous without people necessarily predicting it. They don’t like doing the opposite because it can make markets freeze up, and that can ultimately make it harder for ordinary households and businesses to get hold of the cash that they need. So negative surprises (sic) generally frowned upon. And so that’s why there is this symbiosis between markets and central bankers that central bankers are not there to make promises. They always heavily caveat their statement. But we’re in a situation, again, just because of the precedent that’s been set since 2008, where the market feels like it’s getting hard promises and sometimes those promises are not as hard as they first appear.

Marc Filippino
Katie Martin is the FT’s markets editor. Thank you, Katie.

Katie Martin
Pleasure.

Marc Filippino
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The FT News Briefing is produced by Fiona Symon and me, Marc Filippino. Our editors Jess Smith. We’d help this week from Peter Barber, Gavin Kallmann and Michael Bruning. Our global head of audio’s Cheryl Brumley, and our theme song is by Metaphor Music.

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