G7 sovereign debt markets come into focus
The Bank of England had to yet again intervene in the UK bond market to provide stability as yields rose to begin the week. In Japan, the 10 yr Japanese Government bond did not trade for three straight days, which has never happened before. In the US, the MOVE index, which measures the volatility of the US treasury market, has been at highly elevated levels for weeks. Volatility of government bonds during periods of crisis is common in Emerging Markets; however, we seldom see this in G7 countries like the US, UK, and Japan. While we have seen ramifications in the UK, where pension funds had levered their UK bond holdings leading to steep losses, the price action and lack of liquidity across other G7 government bond markets increase the probability of other crises arising.
CPI came in hotter than expected and markets… rallied
The Consumer Price Index, the government measure of inflation, came in higher than expected this week. While the market initially sold off significantly, it rebounded strongly, ending with one of the biggest market turnarounds in history. There were no great explanations for the market action, except that positioning was very negative. While the market has been very focused on inflation, given its direct effect on the Federal Reserve’s interest rate policy, we believe the market may now be shifting its focus towards market fragility in hopes of a Fed pivot.
US sanctions on the Chinese semiconductor industry
While not widely reported, the Biden administration announced heavy-handed sanctions on the Chinese semiconductor industry. The restrictions have immediately forced US chip equipment suppliers to suspend sales and services to Chinese semiconductor manufacturers. They also required US citizens to seek permission from the Department of Commerce before supporting Chinese semiconductor fabrication plants. While this development is relatively new, it seems like it could seriously impact an industry under significant pressure. It also seems like another source of friction in what is already a tense relationship with the world’s second-largest economy
