The distortion of global debt

Valeria Henderson

To put ourselves in a situation, it should be remembered that when an economy – as is happening to the American right now – gets figures close to full employment and inflation close to the coveted 2%, its rate curve is accentuated.

That is a logical consequence of the improvement of economic prospects, since in a scenario where a lot of good business opportunities begin to emerge, it is normal for investors to demand higher returns in exchange for blocking their long-term money, and lower income. at short maturities.

The American rate curve is the opposite

The American rate curve is the opposite

The graphical consequence is a greater slope in the curve of types of that currency, as it has been seen in countless occasions throughout history.

Well, what is currently happening to the American rate curve is the opposite, as you can see in the following graph. The spread or differential between the 2 and 10 year rates is decreasing despite the undeniable improvement in unemployment and inflation figures. And it has been doing so since the Fed began to close the tap at the end of 2013, reaching today the lowest spread levels (flat rate curve) since the beginning of the times of the new normal, that is 2007.

Are the figures in the US economy not true?

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Is it that the reduction in job creation we saw last week is the prelude to another fatal recession in the USA? They do not go around the shots. The explanation will be found if we expand the field of vision and analyze what is happening globally with the types and their curves. The situation is so chaotic at the level of global debt that the central banks of developed economies, with the exception of the Fed, are crushing the types of negative land in their domestic emissions in a massive way. And this forces investors to have to look for positive returns wherever they exist, that is, crushing the yields of most assets (as we already noted here).

Logically, in the absence of returns in Europe and Japan, investors look at the yield of emerging countries (which they also crush with their purchases) but especially at the yield of the US Treasuries. Due to this artificially imported global demand, the curve of these types softens instead of becoming more pronounced, despite the improvement in US macro-economic figures.

And it is that the work of the European and Japanese central banks

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To prevent the collapse of their debt and therefore of their economies – in recent years has devastated the yields of half the world. Look in the following graph the huge proportion of fixed income in negative land that the developed world already has. In some cases, negative ground is entered by the Financial Repression exerted by their central banks, and in others by a flight-to-quality to the desperate money that prefers solvency and definitely renounces performance. This financial repression is turning fixed income into a budding chaos that at the moment only some of us are trying to avoid:

Summarizing and returning to the American rate curve, it is distorting against what is promulgated by all Economy textbooks. It is flattened in full improvement because it is more conditioned by the negative rates that try to alleviate the recession and deflation of the rest of developed economies, than by the decrease in unemployment and the rebound in inflation in the USA. And what is even more surreal, as soon as the rates of the FED begin to rise in line with the improvement of growth and American inflation, the greater will be the differential with the rest of world rates below zero. And therefore, the greater the interest of the international investor, the greater the bearish pressure of the yields and consequently greater flattening of the American curve. So in the future we can have a distortion that leads us to see an inverted curve in full recovery of the US economy.

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