In today’s briefing:
- Yields in Asia Are Far from the Peak
- The Name Is Spread. Credit Spread.
Yields in Asia Are Far from the Peak
- Rates in Asia are among the worst performers this year, but they remain expensive – relative to the US and to their own history – and should continue to underperform.
- Other reasons for rates in Asia to sell off include: a marked increase in inflation, low projected real rates, currencies turning volatile, and deteriorating debt profiles.
- I like paying rates in Asia by pairing them with receivers in countries in other regions. China is an exception in the region as it remains in an easing mode.
The Name Is Spread. Credit Spread.
- The main point behind the Financial Instability Hypothesis developed by Minsky was that artificial stability and low volatility generate complacency amongst economic agents and ultimately lead to suboptimal decisions: the seeds of the next crisis are sown in the good time.
- Once economic agents are confident nothing can ever go wrong, borrowing happens on more and more relaxed terms until anybody qualifies for leverage without credible possibilities to produce enough cash flows to service their liabilities.
And at some point, something breaks. - Credit spreads are an incredibly important variable to monitor if one wants to grasp at which stage of the leverage cycle we’re in: very narrow credit spreads imply borrowers have easy and abundant access to leverage while widening credit spreads are generally the canary in the coal mine for things to get worse for the private sector.
Before it’s here, it’s on Smartkarma
