US Treasuries Surge

The noise

• The UK economy grew by 0.3% in January per The Office for National Statistics, following a contraction of 0.5% in December. This beat economist expectations of 0.1% growth, driven by the services sector expanding by 0.5%. The last economic health check before next week’s budget could give chancellor Jeremy Hunt a slight boost, as he prepares to set out the government’s tax and spending policies.

• US Jobless claims surged to its highest since Christmas, the first time in eight weeks that it has topped the 200,000 mark. The jobless data, coupled with concerns about the health of the US banking system sent treasury prices surging. Silicon Valley Bank announced it was issuing $2.25 billion of shares to bolster its capital position after a significant loss on its investment portfolio, triggering a sharp selloff in US banks and the migration towards Treasuries.

• Sheikh Tahnoon is becoming chairman of Abu Dhabi’s $790 billion sovereign wealth fund, widening his influence in the UAE. He is currently the country’s national security adviser and head of its largest bank, and is already one of Abu Dhabi’s most influential figures. His appointment comes as the fund starts pivoting away from traditional passive investment strategies and moving towards alternative asset classes such as private equity and infrastructure.

​The numbers

The nuance

On Wednesday, Jerome Powell, Chair of the Federal Reserve Bank testified before the US Senate banking committee in his semi annual update to politicians. His message indicated that more rate hikes would be forthcoming to slow the economy, putting people out of work in the hope that this would reduce the still persistently high rate of inflation. The bond market reaction was to price in a half percent interest rate rise at the next meeting rather than the quarter percent pencilled in prior, but also to lower longer term yields in reflection of a greater change of recession. Equity markets took the news fairly well with only a moderate decline, shrugging off the bond markets expectation of a recession.

We are in unchartered territory, and it is clear that the policymakers are not sure how to react, making them highly dependent on short term data signals. The narrative of a no landing is once more evolving to one of a soft landing. Gauging how market participants will react is exceptionally difficult, and why allocating capital to timing market moves should be done sparingly. Nevertheless, one can hypothesise how scenarios may play out.  An initial slowdown would spark a capitulation in the fight against inflation and shift the focus to interest rates to support the economy, under the assumption that inflation will burn out. Longer dated government bonds are likely to do well here which is why we have been rebuilding our exposure. However, after the initial market move and economic slowdown it is possible that fiscal stimulus and lost productive capacity keeps inflation high as the monetary base is supported by enhanced deficit spending and banks being ordered not to call in loans. At such a point bond yields may reverse and sell off as inflation is revealed to be structurally higher. Equities may be volatile providing buying opportunities, but those providing essential, necessary, or productivity enhancing services should fare well regardless. 

Quote of the week

“Alligators don’t make good pets, y’all”
Texas Parks and Wildlife Department

An alligator, believed to have been stolen as an egg has been returned to its zoo 20 years after the theft.

Tewa, the 2.5 metre alligator was taken by a volunteer at Animal World & Snake Farm Zoo in Texas. The woman who stole the egg said “she stuck (the egg) in her pocket… and walked out the door”.

According to the Texas Parks and Wildlife Department, Tewa was kept in a garden for many years, some 50 miles from the zoo in Austin. The zoo director admits that the woman cared for the alligator well, and that the gator was in good health when they found it.

Following weeks of preparation to move Tewa, the Zoo director said “She’s doing fantastic. We introduced her to the group immediately on Friday after we found out it was female”. Female alligators are usually easier to introduce to groups because males are much more territorial.

Now residing in the zoo’s big pond, the former owner can come visit Tewa as much as she likes.

Source: USA Today





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