Category Archives: debt

16/10/2019:Corporate Bond Markets are Primed for a Blowout

My this week's column for The Currency is covering the build up of systemic risks in the global corporate bond markets:

Synopsis: "Individual firms can be sensitive to the periodic repricing of risk by the investors. But collectively, the entire global corporate bond market is sitting on a powder keg of ultra-low government bond yields, with a risk-off fuse lit by the strengthening worries about global economic growth prospects. Currently, over USD 16 trillion worth of government bonds are traded at negative yields. This implies that in the longer run, market pricing is forcing accumulation of significant losses on balance sheets of all institutional investors holding government securities. Even a small correction in these markets can trigger investors to start offloading higher-risk corporate debt to pre-empt contagion from sovereign bonds markets and liquidate liquidity risk exposures."

1/9/19: Priming the Bubble Pump: Extreme Credit Accommodation in the U.S.

Using Chicago Fed National Financial Conditions Credit Subindex (weekly, not seasonally adjusted data), I have plotted credit conditions measurements for expansionary cycles from 1971 through late August 2019. Positive values of the index indicate tightening of credit conditions in the economy, while negative values denote loosening of credit conditions.

Since the start of the 1982 expansionary cycle, every consecutive cycle was associated with sustained, long term loosening of credit conditions, which means the Fed and the regulatory authorities have effectively pumped up credit in the economy during economic expansions - a mark of a pro-cyclical approach to financial policies. This trend became extreme in the last three expansionary cycles, including the current one. In simple terms, credit conditions from the end of the 1990s recession, through today, have been exceptionally accommodating. Not surprisingly, all three expansionary cycles in question have been associated with massive increases in leverage and financialization of the economy, as well as resulting asset bubbles ( bubble in the 1990s, property bubble in the 2000s, and financial assets bubbles in the 2010s).

The current cycle, however, takes this broader trend toward pro-cyclical financial policies to a new level in terms of the duration of accommodation and the fact that it lacks any significant indication of moderation.

U.S. and Foreign-Owned Long-Term Securities

Not long ago, we looked at foreign ownership of U.S. stocks, which raised a question from our readers: "How much of the world's stocks do U.S. investors own?"

We don't have a specific answer for that question, because the U.S. Treasury Department groups equities, such as stocks, in with debt having a term-to-maturity of one year or longer into the category of long-term securities in its data on the topic, where the question we can answer is "how much of the world's long-term securities do U.S. investors own?"

In the following interactive graphic, we show the answer recorded at the end of June for each year from 2002 through 2018. [If you're accessing this article on a site that republishes our RSS news feed, please click through to access a fully working version on our site, or click this link to see a static image of that chart.]

In the chart, we've compared apples-to-apples as best we can, showing the values of foreign long-term securities owned by U.S.-based investors against the backdrop of the value of U.S. long-term securities held by foreign interests.

Reviewing the history, we see that U.S. holdings of foreign long-term securities as a percent share of foreign holdings of U.S. long-term securities rose from 54% in 2002 to peak at 70% in 2007 before plunging to a low of 54% in 2010. Through 2018, it has recovered to 63% of the value of foreign-held U.S. long-term securities.


U.S. Department of the Treasury and Federal Reserve Bank of New York. Foreign Portfolio Holdings of U.S. Securities, as of June 29, 2018. [PDF Document]. 15 May 2019.

When Sovereign Debt Becomes A Giffen Good

Komal Sri-Kumar is the president and founder of Sri-Kumar Global Strategies who just had a very interesting bit of analysis published by Bloomberg: The Bond Market Is Now a Giffen Good. In this piece, he makes the argument that sovereign debt, such as U.S. Treasuries, may be considered to be a Giffen good, which he explains in his opening paragraphs:

With some $13 trillion of bonds worldwide yielding less than zero percent, it would be easy to characterize fixed-income assets as nothing more than a giant bubble waiting to burst. Those who agree probably haven’t heard of the concept of a “Giffen good.”

Simply put, a Giffen good is a paradox of economics where rising prices lead to higher demand, which is in contrast to the negatively sloped demand curve that students learn in Economics 101. Named after 19th century Scottish economist Sir Robert Giffen, a Giffen good is typically an essential item that, because of its higher price, leaves less resources to purchase other items. (To be sure, many economists debate whether a Giffen good actually exists.)

In terms of the bond market, it’s important to understand that the rapid plunge in yields, especially for sovereign debt, reflects increased concern about the state of the global economy. Those concerns, in turn, only fuel demand for the safest assets even at negative yields, which pushes prices higher and yields even lower.

He goes on to identify three factors (which we've excerpted below) for why the interest rate yields of sovereign bonds and Treasuries are falling, which in the strange world of bond investing, means their prices are going up:

First, inflation rates have been low or declining in the U.S., euro zone and Japan, encouraging investors to allocate more resources to fixed-income assets despite falling yields. High rates of inflation reduce the purchasing power of bond holders, but low rates of inflation do the opposite....

Second, expectations for central bank monetary policy have been kind to bond investors. Ten-year yields have fallen below policy rates in the U.S., Germany and Japan, providing a reason – and pressure - for monetary authorities to reduce rates....

Third, the steep decline in U.S. and German risk-free yields have increased the attractiveness of lower-rated sovereign credits.

How long sovereign bonds and Treasuries might act like Giffen goods remains to be seen, but we should recognize that the conditions that bring Giffen goods into existence are typically transitory. Either those conditions will not endure, or should they persist, at some point, the rising prices that might have initially motivated investors to buy increased quantities of sovereign bonds may grow too high, with demand for sovereign debt sharply dropping off after that point as the Law of Demand reasserts itself.

No one really knows how high that price is. Nobody should want to find out the hard way.

More Reading

Frank Steindl introduced the concept of Money and Bonds as Giffen Goods back in December 1973, which is the earliest reference to the concept that we can find. It is also the only reference we can find before we began exploring the concept of Debt as a Giffen Good back in May 2009.

Since then, a few analysts have weighed in on the topic, including StatsGuy's Money as the Ultimate Giffen Good at The Baseline Scenario in December 2009, Eric Falkenstein's Treasuries a New Kind of Giffen Good at Falkenblog in August 2011, Kevin Erdmann's discussion of Bonds and Real Estate as Giffen Goods in May 2014, and our own followup More Evidence That Debt Is A Giffen Good in January 2017.

While not considering the role of either money or debt as a Giffen good, Timothy Taylor wrote about recent, strong evidence of Giffen Goods in Real Life at Conversable Economist in January 2012. Since the reputation of Giffen goods is that they are elusive, it's fascinating to see them documented whenever they appear.

And speaking of sovereign debt, we would be remiss if we didn't include Visual Capitalist's United Nations of Debt infographic showing data from 2017:

Visual Capitalist: United Nations of Debt

Nearly every nations' debt is bigger now. What could possibly go wrong?