Archives of “term debt” Tag

The emerging-market squeeze

THE flow of troubling news out of emerging markets is picking up. Equity indexes around Asia continued their recent losing streak this morning. Though India has borne the brunt of recent market punishment—the rupee’s epic slide has continued this week—there is plenty of pain to go around. Indonesian stocks have tumbled more than 10% over the past few days. Growth is cratering around the region.

Most news stories relate the carnage to anticipated changes in Federal Reserve policy: “tapering”, which may begin in September or October, of the pace of stimulative asset purchases. But why should that matter?

Large-scale asset purchases, or quantitative easing (QE), are generally described as working through several channels. One is an expectations channel. Purchases may help communicate central bank goals or increase policy credibility. Purchases can have a fiscal effect; by lowering expected government borrowing costs QE may reduce expectations of future taxation, encouraging more work and investment in the present.

Empirical assessments focus overwhelmingly on a third channel: portfolio rebalancing. When a central bank buys certain kinds of assets they leave the banks or funds who sold them the assets short of the particular kind of asset the central bank bought. So a fund that intends to keep a certain share of its portfolio in safe-ish long-term debt will sell Treasuries to the Fed in exchange for newly printed cash, but will then find itself in need of portfolio rebalancing to get back to its preferred distribution of risk, maturity, and so on. The fund then takes its cash and buys something similar to the assets it sold: highly rated mortgage-backed securities or corporates, for instance, or the safe debt of foreign governments. But the funds selling those assets will also need to rebalance, and they may adjust their portfolios by purchasing safer emerging-market debt or equities. As the money works its way through the system it raises asset prices around the economy. And because some of the rebalancing involves purchases of foreign assets, they weaken the domestic currency and can reduce borrowing costs and raise equity prices abroad. Read More  

US deficit falls faster than expected

The US budget deficit is declining faster than expected as the government collects more revenue from companies, households and the two mortgage companies it rescued in the financial crisis in the latest sign of the rebound of the world’s largest economy.

The brighter fiscal outlook comes as other advanced economies are struggling to reduce their deficits through drastic spending cuts and tax rises at a time of weak or negative growth. Growth figures to be released on Wednesday are expected to show that the 17-country eurozone contracted again.

New figures released by the non-partisan Congressional Budget Office showed the US budget deficit falling to $642bn, or 4 per cent of gross domestic product. Read More