The recent US 10 year treasury note auction of $27B saw a tepid response with bid cover ratio of 2.17, the lowest in a decade. 2.17 figure here corresponds to the demand for the treasuries i.e. there was 2.17 times demand for them. US debt has ballooned to 22T with 3.9T sitting on the FED balance sheet. The US will have to be very careful with it’s budget deficit going forward taking due diligence of law of economics into consideration. The 10 year yield at 2.49 is on par with yields on a 6 month Treasury bill at 2.45 highlights further concerns of investors. US Treasuries are still the safest haven for investors but it seems soon investors might start looking at commodities like Gold as a replacement for safe investing. Euro is structurally flawed although Scandinavian debt would look good as an asset class diversification. Financing has been a major hurdle for building infrastructure projects and this article will be expanded soon. Like Pulp Fiction movie, all dots will connect at the end of this rapidly building interesting article.
The core inflation rate is low at 1.6% missing the target of 2% with federal fund rate hovering around 2.5%. Hopefully, as Mr. Powell discussed, low inflation number is temporary. The Fed balance sheet is down to $3.9T and has both Mortgage Backed Securities and Treasuries. The low inflation is worrisome since the US economy is in top gear. Unemployment at the lowest levels with one of the highest wage growth in recent years, low core inflation (excluding energy and food prices) smells trouble.
Inflation is of two types: the supply side and the demand side. Printing excess money did not yield in much inflation and we will have to wait and see the next quarter for the demand side effect to structure out. Monthly treasury securities reduction is down to $15B from $30B from this month. With low inflation, pruning security reduction makes sense although according to experts treasury security reduction did not cause liquidity crunch. FED is right in waiting for another quarter to understand the direction of inflation for a more decisive action.
Attaching the link to the balance sheet normalization plan of the FED.
Implementation Note Issued May 1, 2019
My man Joe Biden recently kick started his Presidential bid campaign for 2020 with his first rally at Pittsburgh. I am impressed by his presidential campaign and it looks a lot of thought process has gone behind it. Guess which city in the US has been prominently highlighted on my blog. Of course Pittsburgh.
Coming up a special feature on the infrastructure story in the US. This month there would be a lot of vibrancy here. So stay tuned.
I had mentioned about the duration of bonds in my earlier article since I had read a report highlighting the duration of some US sovereign bonds to be 7. (Citation Needed). Duration is nothing but price sensitivity of bonds to interest rates. More on this at a later date.
The Global Impact Investing Network (GIIN) just released a report on impact investing market. Looks an interesting read. 1340 organizations manage $502 bn assets globally which is less than 1 percent of the size of global capital markets. Asset managers dominate with 51% of estimated AUM and DFI at 27%. To make the impact space more impactful, the size of DFI must increase exponentially. Maximum number of the sample organizations are headquartered in North America.
The FED will not be increasing any more rates this year and there might be a possibility of a rate cut. The US yield curve is showing an inversion forecasting a possible recession in the US. I had argued in my article on Jerome Powell about inverted yield curve a few months back when the yields were flat. Somehow my words have proved to be prophetic which is a bit scary for me. The labor market looks very strong still in the US.
One of the major strategic use of blended finance is to enhance funds in the development sector especially in low and middle-income countries. In order to attract capital from the private sector especially institutional investors the idea of catalytic first loss capital evolved. Continue reading “Blended Finance 2: CIV and much more”
David Beckham’s iconic signature dead ball free kicks remain enshrined forever for curvy goals which flummoxed the best goalkeepers in the world but David’s was certainly not known for his innovative financial structuring skills.
Welcome Blended Finance. Blended Finance not to be confused with bending finance, is fast becoming an important and potent tool for bridging the yearly $2.5tr gap to meet the UN Sustainable Development Goals target by 2030. Blended Finance is not a panacea for the global development crisis but stills works as an innovative way to pool in commercial capital to aid risk-adjusted return for development projects. OECD defines blended finance as the strategic use of development finance for the mobilization of additional finance towards sustainable development in developing countries. This is a defining change in the scope of blended finance from its work as various financial structuring instruments to its strategic use as a form of finance to eradicate social inequity. Continue reading “Blended Finance: Please don’t blend it like Beckham”