True Safe Havens Needed as Fed Monetizes Uncle Sam
A financial safe haven is generally an instrument that is expected to hold or increase its value in the face of market turbulence. It is used by investors to reduce exposure to declines resulting from downturns in the market or economy. What is considered a safe haven can change depending on market conditions, but a few asset classes typically come to mind. In the current financial landscape, there is a growing need for true safe havens.
U.S. Treasury instruments are widely considered to be a standard safe haven for investors, as they are backed by the full faith and credit of the U.S. government, for what that may be worth. The thinking also goes that if investors dump equity holdings, the money will flow into bonds. However, with central banks intervening in the marketplace more than ever, investors are not receiving a true demand and supply picture of the bond market, which distorts investment decisions and creates capital misallocations. Furthermore, investors who believe U.S. Treasuries are a safe haven and seek to purchase them, will have to compete with the Federal Reserve.
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Jeffrey Gundlach, the well-known bond investor and chief executive officer of DoubleLine Capital, recently said, “I think it will be more likely that the Federal Reserve buys all the Treasury bonds that exist than starts selling them.” That idea is quickly coming to fruition. A Bloomberg article citing JPMorgan Chase explains that the Federal Reserve will likely add about $45 billion of Treasury purchases per month to its already existing QE-to-infinity-and-beyond program. This would bring the central bank’s total monthly haul to $85 billion. Even more staggering, the Fed will be “effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets,” according to JPMorgan Chase, which is a member on the board of directors at the Federal Reserve’s New York Bank.
Uncle Sam has a new best friend…