The International Monetary Fund said it was closely monitoring longer-term US treasuries, as uncertainty surrounding President Donald Trump's tariffs cause mayhem across financial markets.
In its Global Financial Stability Report published on Tuesday, the IMF said Mr Trump's tariffs had “significantly” increased risks to financial stability.
The report comes as Mr Trump's agenda hangs over the IMF and World Bank Spring Meetings in Washington.
Global markets slumped after the US leader's announcement on April 2 was larger and broader than analysts had expected, leading to a mass sell-off over fears of a potential US-led global economic downturn. But it was the surge in the bond market that led Mr Trump to pare back his so-called reciprocal tariffs one week after the announcement.
Investors typically snap up government bonds during times of market volatility, but instead the yield on the 10-year Treasury surged to 4.51 per cent while the yield on the 30-year topped 5 per cent. Yields on the 10 and 30-year treasuries have climbed down to about 4.37 per cent and 4.85 per cent, respectively.
“We are looking at the pricing of long-dated treasuries very carefully,” Tobias Adrian, director of the IMF's monetary and capital markets department, said at a news briefing. “We have seen a volatility in the prices moves but these are within normal historic norms. We have not seen disorderly leveraging at this point.”
His remarks came a day after the US dollar index, which measures the greenback against a basket of currencies, fell to a three-year low. That has sparked concerns of the dollar's status as a safe haven.
“What is somewhat unusual is that the dollar has been falling to some degree but it's important to keep it in the context of a strong dollar rally previously,” Mr Adrian said.
He added that it was unusual to see the dollar declining at the same time as longer-term yields increasing but it was “too early to tell” how long-lasting that would be.
Central bank independence
The latest bout of market volatility comes as Mr Trump steps up his attacks on Federal Reserve chairman Jerome Powell, threatening the central bank's independence.
His threats against Mr Powell – recently posting on social media that his “termination cannot come soon enough!” – could also shake the confidence of investors who rely on an independent central bank's monetary policy decisions.
Mr Powell had said the President's levies could put the Fed in the difficult position of having to choose between its two mandates: price stability and maximum employment.
“We have seen time and time again that central bank independence is the bond foundation for central banks to achieve their goals,” Mr Adrian said.
Those remarks echoed sentiments made by IMF chief economist Pierre-Olivier Gourinchas, who earlier said central banks must preserve their independence to maintain credibility in fighting inflation.
And speaking on the sidelines of the Spring Meetings, European Central Bank chief Christine Lagarde told CNBC that she hoped Mr Trump would not try to fire Mr Powell.
Mr Powell maintains that the President does not have the legal authority to fire him or governors on the Federal Reserve Board.
The burning issue
The internal combustion engine is facing a watershed moment – major manufacturer Volvo is to stop producing petroleum-powered vehicles by 2021 and countries in Europe, including the UK, have vowed to ban their sale before 2040. The National takes a look at the story of one of the most successful technologies of the last 100 years and how it has impacted life in the UAE.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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Favourite Emirati dish: I have so many because it has a lot of herbs and vegetables. Harees (oats with chicken) is one of them
Favourite place to go to: Dubai Mall because it has lots of sports shops.
Her motivation: My performance because I know that whatever I do, if I put the effort in, I’ll get results
During her free time: I like to drink coffee - a latte no sugar and no flavours. I do not like cold drinks
Pet peeve: That with every meal they give you a fries and Pepsi. That is so unhealthy
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Key facilities
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- 600-seat auditorium
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Explained
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THE SPECS
Engine: 1.5-litre
Transmission: 6-speed automatic
Power: 110 horsepower
Torque: 147Nm
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