Not Counting Chickens

Investors brace for G20

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What's going on?

The G20 leaders of the world’s largest economies are gathering in Japan. Investors are focused on whether the US and China will strike a trade deal – but their voracious buying of government bonds suggests they aren’t convinced one will be forthcoming.

What does this mean?

Income from government bonds is a pretty sure thing – they can always print money to repay their debts – and so investors tend to buy them in times of uncertainty. Longer-term bonds usually offer higher interest rates than short-term ones since there’s a greater risk of them not being repaid. But record demand for all debt vintages (including 100-year bonds) is narrowing and in some cases inverting that gap.

Investors may be both skeptical about a US-China deal and confident of imminent central bank interest rate cuts. Lower rates would mean new bonds offer a lower return, making existing ones more attractive. Indeed, major investment banks now expect investor demand to push government bond yields even lower.

Why should I care?

For markets: A trade deal could burn bondholders.

A landmark agreement between the US and China could provide a short-term boost to both countries’ economies. And since neither would need as much propping up from central banks, interest rates would be less likely to fall. If they rose instead, bond investors could face major losses. But that’s a big if. China’s insisting that any deal includes the US revoking its ban on telecoms giant Huawei, which has been the recipient of Chinese government subsidies that the US isn’t too happy about (tweet this).

The bigger picture: America keyed down.

While the Brazilian delegation was perhaps too eager to hit the powder in Osaka (😉), North Americans were crestfallen that the US’s first-quarter economic growth reading wasn’t revised up on Thursday. It’s now even less likely that the country’s better-than-expected growth trick will be repeated this quarter: analysts predict 2% growth while acknowledging that weak data could mean the economy slows further throughout the rest of 2019.

Originally posted as part of the Finimize daily email.

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