Haunting histograms – Halloween in fixed income markets
The FT's Miles Johnson and Anthony Doyle of M&G discuss current fears in the fixed income market, including untamed debt levels, the ghost of low productivity and Brexit
Produced by Alessia Giustiniano. Filmed by Rod Fitzgerald. Graphics by Joe Russ.
For investors worried about overpriced assets, these are scary times. So to coincide with Halloween, we have Anthony Doyle here, investment director at M&G, to show us some scary charts that might give investors some pause for thought. Anthony.
Cheers. So the first chart is really a look at global debt to GDP levels. And this is the grand chart of them all, really, looking at debt to GDP levels, and also the absolute of stock of debt outstanding. Now, obviously, this debt represents an asset on another balance sheet. But what's really interesting is, if you think about, how can central banks possibly hike rates today when there's so much public sector and private sector debt that exists out in the global economy? And with most of the contribution of this growth in debt coming from China, that still remains a very big concern for investors today.
And now, we show here that EC silver and bond purchases have been propping up the market.
Yeah, now, obviously Europe has been really the surprise macro story of 2017 with lower unemployment rates and better PMIs and stronger economic growth. And you've seen yields fall across the eurozone. So many are suggesting that the eurozone debt crisis has healed and is probably over. But what is more interesting is that the demand has definitely picked up for peripheral bonds in particular and European government bonds. And that's really been generated by the ECB's quantitative easing programme. So the ECB today now buying seven times more than government bond issuance, which is obviously a demand supply story.
Here we have investors herding into risky assets.
Yeah. With interest rates so low across the developed world, it's no wonder why investors have moved out their respect. You have this portfolio rebalancing of quantitative easing in search for positive real yields. So they've herded into high yielding assets, like high yield and emerging market debt. Now, the big question is, if you do get some sort of macroeconomic wobble or spike in risk aversion, what happens when these investors start to rush towards the exits? Well, more than likely, you're going to start to see many of the funds that have purchased this type of debt really suffer capital losses.
And here, you point out that labour's pricing power has declined. Why is that scary?
Well, higher wages is really the key determinant of higher inflation. So you've had this extraordinary monetary policy conducted throughout the developed world, but it remains questionable as to what extent that has really had in terms of generating higher inflation. So several central bankers have come out-- Draghi and Kuroda at the Bank of Japan-- suggesting we need to see higher wages before we see higher inflation. And with labour's pricing power diminishing over the course of a number of decades, such as falling union membership rates and employee rights, it's questionable as to when you start to see workers really pushing for those higher wages going forward.
Lastly, you point out that the vast majority of UK trade is conducted under the EU, EEA, or preferential trade agreements. Can you tell us a bit about that?
Well, it's a mouthful obviously. But what's Halloween without a scary Brexit chart? So for the UK economy, the vast majority of trade is conducted under those agreements that the EU has negotiated or is currently negotiating within the global economy. So only 14% today currently covered under WTO rules if you think about the UK's current trading position. So what happens in April 2019? Will there be sort of lorries at the borders? Will WTO tariffs be implemented? Scary stuff if you're an economist or an investor in the UK, but obviously something to consider going forward. Thank you very much, Anthony.
Cheers. Thanks very much.