Heading for the Great Repression? | Citi

[Jay Shah]

Heading for the Great Repression?

Investing in a world of government-suppressed real yields

 Every credit investor should consider the following: Why are real yields in so many countries near historical lows despite historically poor fundamentals?

 One key reason is that burgeoning government debt burdens are leading to ever more measures to influence market pricing.

 Financial repression takes many forms, but the primary aim is to keep real yields below market clearing levels. Some policies are already in place, many more will likely follow.

 Central bank balance sheet expansion alone corresponds to almost half the increase in general government debt in the US, the UK and the Eurozone since 2008 (Figure 1).

 To begin with, repression seems likely to drive more money into risky assets like credit.

 Longer term, however, history suggests the distortions and even bigger imbalances need to correct with a very negative impact on credit spreads.

 Even during the benign period, volatility and uncertainty are likely to be far higher than investors have grown used to, thanks to abrupt and far-reaching changes in policy.

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Best Regards,
Jay Shah, FRM
Expect the unexpected!!!