Email of the day - on debt servicing costs and liquidity
Comment of the Day

January 13 2021

Commentary by Eoin Treacy

Email of the day - on debt servicing costs and liquidity

You've been pointing to this risk mentioned by Mohamed El-Erian in this article.

Is there an answer? Can the Fed extricate itself without damaging markets?

"One of the most under covered stories is what’s happening to the US yield curve. It’s on a consistent move up, and that puts the Fed in a very difficult position, because if it allows the curve to continue to steepen it can undermine financial stability. If the Fed wants the yield curve to stop steeping, it has to implement yield curve control, or what they like to call yield curve targeting. But yield curve targeting is a huge step in policy. It would distort the US Treasury market completely. So keep an eye on this, because this is starting to get to dangerous levels."

Also he sounds as if he is saying that trend following is the most viable strategy now - get out when the trend breaks!

"Honestly, I’m really happy that I don’t manage other people’s money. That’s because I know I would go back to doing something that is very tactical in nature: I would be like a surfer on a wave, knowing that the liquidity will end at some point, but going to be on it for as long as I can. I would look around and see that many other surfers are riding the same wave, and I would start wondering what happens if we get into each other's way or if the wave breaks. So I would be a very nervous investor."

Eoin Treacy's view

Thanks for this article which offers a fresh perspective on the outlook for rates, liquidity and momentum trades. Sometimes it helps to take a birds-eye view.

Wall Street has been rallying since late 2008 so we are in the 13th year of the uptrend. In that time the leading companies are those that benefitted from the introduction of 4G and quick internet connectivity. The second group of companies that benefitted took the biggest bets by utilising cheap abundant credit to the greatest effect. So outside of everything else that has happened, the two big themes have been technological advances and cheap credit. Therefore, it makes sense that those are the topics we need to continue to pay attention to as the trend matures.

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