The global imbalance between fast-growing emerging markets and more sluggish advanced economies is a key reason for extremely low and even negative yields on safe assets, British economist Chris Crowe argues on Monday’s edition of the Macro Musings podcast.
Crowe, head of economic and flow research at London-based hedge fund Capula Investment Management LLP, estimated that total available safe assets peaked around 70 percent of global gross domestic product in 2009-10 and are now only equivalent to about 45 percent of the world economy.
“As demand has increased with the growth of the global economy, the net supply of those safe assets has not kept up,” he said.
Even with sovereign debt-to-GDP ratios elevated in some economies, including the United States, yields on government paper remain at “remarkably low levels, which I think tells you that there is this sort of strong demand for safety, for relatively safe assets,” said Crowe, a former International Monetary Fund economist. “People are not looking for return on capital – they’re looking for return of capital. They want to make sure they get their money back.”
Highly rated fixed-income assets total about $65 trillion globally, about two-thirds of it government debt, Crowe said: “That’s relative to a world GDP of $80 trillion, so it’s not a huge amount, really, in terms of people’s demand for this stuff.”
Quantitative easing by major central banks, reserves held by emerging market governments and bank reserve requirements have cumulatively soaked up about a third of the world’s safe assets, leaving what Crowe called an “inadequate supply” to meet private sector demand. “That’s put fairly relentless downwards pressure on yields,” he said.
“The underlying issue and the kind of main driver of this imbalance between supply and demand is really the fact that the economies which are capable, or are judged capable of producing safe assets, are not growing as fast as the economies which are not. And so you have growth in emerging markets consistently running ahead of growth in advanced economies, but advanced economies are not able to issue enough of this paper because their economies are not growing.”
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