Alpha Agenda, Davos > DC edition

This weekly agenda is still in the experimental phase. Hate this week’s shorter format? Love it? We’d like to hear your opinions! Send them to or

For the discerning Alphavillain:

See here for this week’s full calendar. Highlights: Davos; Goodfriend’s confirmation hearing that is probably delayed by the US government shutdown; learning to be a grifter (not at Davos); BOJ/ECB rate decisions; a whiskey tasting on Burns Day.

On the agenda:

The US government is expected to issue more Treasuries in 2018 — could that lead to the return of the term premium?

Deutsche Bank’s Torsten Slok argues that it will (somewhat indirectly, using the chart below), calling the new supply “a significant risk to markets.” The implication is that if the term premium rises and Treasury yields rise across the curve, companies will be forced to refinance maturing debt at higher interest rates, which will raise the costs of corporate debt service, and possibly increase default risk:

It’s tough to say for sure, because the term premium is a bit of a catch-all variable, depending on who’s calculating it. But the market will certainly need to contend with higher issuance (to the tune of $1tn, analysts say) compounded by a shrinking Fed balance sheet this year.

There’s just one issue we’d take with Slok’s chart above: Any analysis of fixed-income supply should include the supply-and-demand dynamics for safe government securities issued by other countries.

The ECB and BOJ’s purchases seem to have helped keep US rates and credit spreads low. As those central banks started to acquire a growing share of their respective bond markets, yield-hungry investors in those regions started buying bonds elsewhere, which we can see in this (slightly older) chart from Dario Perkins of TS Lombard:

One would have to assume a large chunk of those outflows were headed into US debt markets — particularly considering the dollar’s periodic surge pricing.

Expanding our view to include Europe and Japan doesn’t necessarily undermine Slok’s warning about the risks of growing safe-asset supply, though. BlackRock argues that it’s not just US term premium that matters, but the term premia of all three regions (Eurozone, Japan and US), which turned negative when central banks started buying more government securities than their governments were issuing.

And as you can see below, the asset manager is predicting net issuance will be positive this year for the first time since 2014:

That implies term premia will rise when issuance does. If you accept that idea, the main question is how quickly global central banks will follow the Fed in paring down their bond-buying programmes.

The ECB seems like it’s next in line, since it has hinted it might stop quantitative easing this year. (As Brad Setser from CFR recently wrote: “…a falloff in flows from Europe after ECB QE ends seems to pose far more of a risk than China” for US Treasury markets.)

There were even some rumours that the ECB could start signalling a timeline for its plans to reduce QE at this week’s meeting. While officials have walked that back since, board member Benoît Coeuré will be speaking about “the end of easy money” at Davos on Friday. Could be worthwhile to tune in.

Closing quote:

I know it only got one Emmy nomination, but I’ll tell you: You want to see a believable protagonist doing extraordinary sh*t? Don’t sleep on Knight Rider, yo.

You know, it’s kinda sad actually, the general lack of respect afforded to Knight Rider. They drove f***ing gold statues at the Crane brothers, but Michael Knight and KITT? Their relationship predicted the current societal dependence on technology, and that was 30 years ago… If nothing else, Knight Rider should’ve won a f*ckin statue for its dope-ass theme song. I mean, the sh*t just stays with you.

– Leon (played by Joey Bada$$), Mr. Robot, S3Ep7

Copyright The Financial Times Limited 2019. All rights reserved. You may share using our article tools. Please don't cut articles from and redistribute by email or post to the web.

Read next:

Read next:

Lookout, there’s a dollar crunch!

FT Alpha Tweets