Bill Gross, the bond manager, on Thursday renewed his warning that high levels of debt across the world pose a rising risk of derailing the global economic expansion.
The portfolio manager at Janus Capital said that “our highly levered financial system is like a truckload of nitro glycerin on a bumpy road”.
Mr Gross noted that the world economy has generated more debt relative to gross domestic product than it did ahead of the 2008 financial crisis. Credit across the US economy of $65tn equates to 350 per cent of GDP, while China’s leverage ratio has doubled over the past decade to nearly 300 per cent, he noted.
The so-called ‘bond king’ said that while the world economy and financial market continue to chug along — with global equity prices near all-time highs — sudden changes in interest rates could spark a damaging shock.
“If rates are too high (and credit as a per cent of GDP too high as well), then potential Lehman black swans can occur,” he said.
“On the other hand, if rates are too low (and credit as a per cent of GDP declines), then the system breaks down, as savers, pension funds and insurance companies become unable to earn a rate of return high enough to match and service their liabilities.”
The World Bank is hoping to draw attention to the United Nations’ sustainable development goals with a sale of unusual bonds.
Payouts on the securities, which are relatively small, will be linked to the stock market performance of 50 companies considered to be making a significant contribution to the goals, including Nestle and Danone.
The World Bank has been making concerted efforts to promote global sustainability within financial markets and has previously sold green bonds and a sustainable development bond denominated in Chinese renminbi.
BNP Paribas arranged issuance of the €107m 15-year bond and €57m 20-year bond which were sold to a small group of European investors, including the bank’s French and Italian subsidiaries. World Bank Vice Treasurer Arunma Oteh said the bank planned to come to market with similar bonds available to a wider pool of investors in future.
Sustainable development goals were created in the mould of the UN’s earlier Millennium Development Goal and encompass economic, social and environmental objectives such as gender equality and combating climate change.
Another masterclass in central bank market management by his nibs. He’s told us that all the possible “very negative” risks and scenarios they were worried about, the risks they lined up tool after tool after tool to fight, have mostly not materialised and others may not too, at least to the extent they were fearful of.
That doesn’t change the nature of the current monetary policy stance but it removes a big chunk of why policy is as accommodating as it is.
Is that hawkish? Not really but it is yet another sign that the ECB is accomplishing what it set out to do, and that was to stop the rot. It’s more of a bean counter move from the risky pile to the not-so-risky pile, than an indication that they’re going to start tightening. As noted in the statements, it’s a removal of language with the possibility of more to come.
He says the economic recovery is starting to gain more traction, it’s “broadening across the sectors and countries”, another pat on the back for monetary policy.
The euro tested the lower of its range near $1.05 in Asia before short covering in Europe lifted back toward yesterday’s highs near $1.0575. However, buoyed by the upside surprise in the ADP estimate of private sector jobs growth, the dollar is firmer against most other currencies today. The US 10-year yield is up 20 bp this week. Including today’s move, the US 10-year yield is up for the ninth consecutive session, and new 2.57% it had convincingly broken the downtrend in place since the middle of last Decemberwhen the yield peaked near 2.64%.
Sandwiched in between the ADP estimate and the US government’s report, the ECB meets today. With the euro near the lower end of its range, falling for four of the past five weeks, the pain trade is the ECB to be somewhat less dovish. The signal could be a change in the forward guidance about rates remain at current levels or lower. The or lower could be dropped, some believe, in recognition of the solid growth (above trend) and rising price pressures.
However, this does not appear to us to be the more likely scenario. The fact that core inflation is stable in the trough ( now 0.9%, after bottoming at 0.6%), the ECB cannot be confident that energy prices, and to a lesser extent some weather-related increase in some fresh vegetable prices, will fade in the coming months, leaving a return to disinflation in its wake. This idea may deter the ECB’s staff from lifting their inflation forecasts very much.
Also, the ECB will be loath to take measures in the presently charged environment that could be destabilizing. Comments from officials show no strong urgency. The market is doing some of that work already in the sense that outside of a few exceptions, like Germany and the Netherlands, have seen short-term interest rates over the past month.