Aurelia Butler

(Reuters) – A post Labor-day rush of bond issuance by U.S. investment-grade-rated companies added renewed pressure on long-end U.S. Treasuries, as some investors switch to buying top-rated corporate debt offering higher yields than those on government bonds.At least 21 investment-grade rated bond offerings are expected to price on Tuesday, according to International Financing Review (IFR) data. Investors told Reuters they expect anywhere between $100 billion and $150 billion in new bond issuance this month. The average yield on U.S. investment-grade bonds was 5.73% as of Monday, compared to 5.47% at the start of the year and 2.44% in January 2022 when the Fed began hiking rates to combat inflation, according to ICE BAML data.”September tends to be a very heavy supply month, so people will sell Treasuries and existing credit to make room for new issuance,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities USA.Ten-year Treasury bond yields were last about nine basis points above Friday’s market closing, at 4.27% from 4.180%, and 30-year yields similarly climbed about 9 bps to 4.38% from 4.285% on Friday.Long-term Treasury yields, which move inversely to prices, have surged for much of the past couple of months as investors priced in the possibility of interest rates remaining higher for longer than anticipated, as the U.S. economy has proved surprisingly resilient to higher rates.Other factors have also contributed to the selloff, from higher government bond supply to rising concerns around U.S. debt sustainability, as highlighted by Fitch’s downgrade of U.S. debt last month.Yields retrenched last week but started climbing again on Friday.With the Federal Reserve largely expected to keep interest rates on hold at its next rate-setting meeting this month, the corporate bond supply was seen as a factor contributing to higher yields in the coming weeks.”I don’t necessarily think (the Fed) has got any more rate moves or rate tightenings left,” said Tom di Galoma, managing director and co-head of global rates trading at BTIG.”For right now, it’s just all about supply, and I think that’s what’s pushing yields higher,” he said. September is typically the second-busiest month for U.S. debt issuance, according to credit research analysts at JPMorgan Chase (NYSE:JPM), with an average issuance volume of $129 billion over the past four years outside 2020.Among Tuesday’s announced deals were a two-part senior unsecured note offering from Unilever (LON:ULVR) Capital Corp, three-part senior notes from tobacco company Philip Morris International (NYSE:PM) and a five-part note offering from automaker Volkswagen (ETR:VOWG_p). More

The writer is Chief Investment Officer at PGIM Wadhwani and on the Chancellor’s Economic Advisory Council. This article is written in a personal capacity.In recent weeks there has been significant relief that the headline rate of inflation in the UK has come down meaningfully. However, wage growth and core inflation are still well above what is necessary to achieve a 2 per cent inflation target. Although the fall in price inflation should lead to a fall in wage inflation, the Bank of England’s Decision Maker Panel survey still shows expected wage growth and price inflation over the next year at over 5 per cent.It appears that we are seeing “tit-for-tat” behaviour in which workers try to maintain living standards while firms try to maintain profit margins. This is now associated with higher embedded inflation expectations. In order to reduce the extent to which each firm and each worker expects the general level of prices and wages to go up, we might choose to leave it to the BoE entirely, who could then be slow to cut rates even as unemployment rises.When I appeared before the Treasury select committee in July, they asked how the government might help the BoE bring inflation down while keeping unemployment to a minimum. At a time when high wage growth has been associated with labour shortages, boosting supply is obviously helpful. In addition, it would be desirable if the government buttresses its promise to leave the inflation target unchanged to the end of this parliament by saying it would do the same for the duration of the next term if re-elected (the opposition should make the same commitment).The government might also consider a measure that would directly operate to bring inflation expectations down without necessitating a rise in unemployment. This would be a tax on inflation. For example, they might announce a baseline reference level of the growth of average hourly earnings over the next year of 3 per cent. They could then implement a tax whereby each firm who grants a wage increase above 3 per cent would be required to pay a 100 per cent tax on the excess. Concretely, if a firm awards a wage increase of 5 per cent, it would cost it 7 per cent as it would have to pay extra tax equivalent to the difference between the wage increase granted and the baseline reference level. Such an announcement is highly likely to bring inflation expectations down, moving wage and price inflation comfortably lower without the unemployment rate needing to move higher. The BoE could reward such a policy by ensuring that interest rates are lower than they might otherwise have been. To be clear, this tax is not designed to tighten fiscal policy — the revenue could be redistributed, for example, as a per-worker subsidy.When looking for a tax on inflation one could, in principle, introduce a “tax on excess price increases” rather than wage increases. Society already believes that it is appropriate to tax activities where the individual or firm does not fully take the adverse impact on others into account. Tobacco consumption and polluting actions are both examples of this. When a firm increases the price on a good it sells, it does not fully allow for the economy-wide inflationary effect and so an inflation tax seems desirable. The appropriate tax rate would vary over time. It could easily be much lower (indeed close to zero) when inflation expectations subside. That way one could minimise any associated distortions. Indeed, if the measure was always revenue-neutral (and so had no direct fiscal implications), one might even consider handing over the setting of the appropriate rate to the BoE as an extra policy instrument.Of course, one would need to deal with the administrative difficulties that come with any new tax and the inevitable problems of implementing such a scheme. But a government that delivered the much more complex furlough scheme during a lockdown should not allow itself to be deterred by teething difficulties. As a policy prescription, it has a distinguished pedigree dating back to the early 1970s and previous advocates have recommended that it could be a part of the standard PAYE process. There is some evidence suggesting that an inflation tax helped in the transition of some formerly Soviet economies to market economies while the IMF has recently published some research recommending that it deserves more attention. With inflation expectations dislodged, and the possibility that we might see a sequence of supply shocks again in the future, the time has come to help the BoE more in its pursuit of low and stable inflation. A tax on inflation alongside the use of the interest rate tool should improve their chances of success. More

The G20 is supposed to be the premier forum for management of the global economy and the biggest economic issue in the world right now is a chronic lack of demand in China. It is therefore more than unfortunate that president Xi Jinping has decided not to attend the summit in New Delhi this weekend, sending premier Li Qiang instead, and highlighting in the process just how few options other countries will have if China tries to solve its economic challenges by falling back on demand from the rest of the world. Since Xi will not be there to address it, the other world leaders should consider in his absence exactly how they would handle this scenario.As Brad Setser of the Council on Foreign Relations points out, economic weakness in China has little direct effect on other advanced economies, because China makes so much for itself and buys so little from anybody else. Only a tiny fraction of US output reflects the manufacture of goods and their export to the world’s other economic giant. Rather than causing a slowdown elsewhere, the issue is what would happen if China tried to export its way to growth as it did in the 1990s and 2000s. China’s current account surplus already runs at 2 per cent of its enormous economy. If Beijing sought to increase that it would be problematic, but most especially if it did so via policies aimed at holding down the value of the renminbi exchange rate.The benefit of such policies to China is questionable these days. With its economy now so big, and its manufacturing trade surplus already so large, it is hard to imagine how foreign demand can make a big enough contribution to offset the faltering housing market. A focus on exports, however, fits with Xi’s goal of building Chinese strength in high-technology industry and his distaste for a stimulus aimed at domestic consumption. Encouragement for Chinese citizens to travel at home, rather than go abroad, is one example of how policy can divert demand away from other nations.Even if the diversion of demand to China was not enough to generate strong growth at home, it could still cause disruption to the world economy. Most obviously, if China makes its goods more competitive, they will displace production elsewhere. More subtly, a current account surplus must be offset by capital flows. The recycling of China’s surplus contributed to easy financial conditions around the world prior to the 2007-08 financial crash, just as the export of German savings to countries such as Greece was part of the build-up to the eurozone crisis in 2011. Such imbalances in the global economy are not a phenomenon anybody should be in a hurry to revisit.What then can the rest of the G20 do about it, other than urge China to generate more demand of its own? There are few easy answers.One thing to note is that a growing Chinese surplus would have superficial attractions. The economic environment of the mid-2000s was popular: it let western consumers live beyond their means, even if it sped the decline of their manufacturing industries. Right now, a deflationary impetus from China would help to address the rise in the cost of living. This would palliate a source of pain for many western politicians.However, there should now be more international consensus against China running a big surplus than there was 20 years ago. China’s economy is much larger and richer than it was then. Japan and Germany, which have long prospered from exports of luxury cars and capital equipment to China, now confront its rapid emergence as an automobile exporter. The rest of Asia competes with China in export markets so most nations, excepting pure commodity exporters, have something at stake.If the US had not retreated from economic co-operation itself, as it did in abandoning the Trans-Pacific Partnership trade deal, it would have more standing to make these points. With American diplomacy now concentrated so heavily on military and security competition with Beijing, any objections it makes to Chinese economic policy will be regarded with suspicion by many other countries.That leaves the question of tools. One big achievement of the G20 is its agreement to avoid currency devaluation for competitive purposes and maintaining that consensus in New Delhi is vital. There is no enforcement mechanism, however, even against outright currency manipulation, let alone more nuanced policies that drive up a current account surplus but are difficult to detect, let alone dispute.This is a fundamental flaw in the global economic system that dates back to its creation at Bretton Woods after the second world war: countries that run a persistent current account deficit will eventually be forced to adjust via a currency crisis, but there is no mechanism to discipline countries that run a persistent surplus. Yet the surplus of one country must be the deficit of another.Deep reform and collaborative management of the world economy would require the US and China to work together — something that seems today more distant than ever. What world leaders can do at the G20 is signal — to everybody, not just China — their objection to policies that seek to stabilise domestic economies on the back of demand from [email protected] More

NEW YORK (Reuters) – Federal Reserve Governor Christopher Waller said Tuesday the latest spate of economic data is giving the central bank space to see if it needs to raise rates again. Recent economic news is “going to allow us to proceed carefully,” Waller said in a CNBC interview, adding “there’s nothing that is saying we need to do anything imminent anytime soon, so we can just sit there, wait for the data, see if things continue” on their current trajectory. Waller spoke to the television channel following the release Friday of hiring data that showed that in August the economy continued to gain jobs at a solid clip even as the unemployment rate shot up to 3.8% in August from 3.5% the month before. More