2019_08_14 — “The US Treasury rally may have more to do with Hong Kong than with the US economy”
August 14, 2019
The US Treasury rally may have more to do with Hong Kong than with the US economy
The US Treasury rally (prices up, yields down) may have more to do with Hong Kong turmoil than with US economic fears.
Hong Kong is a major global financial center, like London and New York. If you were a Hong Kong (HK) based asset manager, where would you move your clients’ money after months of street protests and with China amassing troops and tanks in Shenzhen, on the HK border? Safe U.S. treasuries would seem a good option; huge liquid market, positive yield, strong currency, and far away from China.
Too many structured notes: This may be especially true for the HK market which had a penchant for equity exposure wrapped in a fixed income structured note (i.e., a type of bond where coupon income and total return are tied to equity market performance). The investor gives up some upside opportunity for some downside protection, but risk of capital loss remains. In other words, these work okay, until they don’t.
I expect that Hong Kong asset managers sitting on an expanding pile of risk are downsizing exposure and clamoring for safe assets in a huge way. Managers of Argentinian and emerging market debt are probably doing similar. Other global managers are probably similarly playing this move.
This rush for safety may have as much or more to do with the U.S. Treasury market rally than domestic fears of a recession. Nonetheless, domestic economic fears along with inverted yield curves and their propensity to predict recession make for easy to understand news headlines and feed on a decade of expectations for the next recession.
Michael Ashley Schulman, CFA
Disclosure: The views and opinions expressed are those of Michael Ashley Schulman, CFA and are subject to change without notice. This material is provided for informational purposes only, does not constitute an offer or solicitation to purchase or sell any security or commodity or invest in any specific strategy, and is not a recommendation. It is not intended as investment advice and does not take into account each investor’s unique circumstances. Information is speculative, made up, or obtained from sources believed to be reliable; its accuracy, completeness and interpretation cannot be guaranteed. Past performance is no guarantee of future results. Stocks, securities, companies or investments mentioned may be held long or short by the author.
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