Credit to GDP ratios - Telling the fiscal story

The BIS uses the credit-to-GDP ratio as an early warning indicator of financial excess. It clearly showed extremes before the GFC. You can also see the explosion of credit after the Great Pandemic, which was a man-made surprise. Currently, the private credit-to-GDP ratio looks tame, although there is a clear movement to higher levels. 

The story looks very different when we look at public credit-to-GDP. The public debt usually spikes after a market peak as fiscal policy kicks in to support the economy. The public debt is increasing but not at levels that seem excessive, yet there has never been a reversal of the Pandemic extremes. 

What is most interesting is when we difference the private and public change as a percentage of GDP. There is a large secular change in the composition of debt from private to public. The issue with this switch is whether the government can afford its spending. Get ready to pay through more taxes or through a debasement of the debt. 

 

Convenience yield is falling for Treasuries

Interest rates have been rising with what some may call the "Great Bond Sell-off" of 2026, yet there are other underlying problems that will have much longer-term implications for US debt markets. There has traditionally been a convenience yield associated with US Treasuries because it has been viewed as a safe asset. The safe asset problem is arising because the supply of Treasuries has been increasing relative to demand, thereby reducing the convenience yield. Additionally, other policies affect Treasuries as a safe asset. If the reserve currency is also perceived as less safe, global investors will be less inclined to hold US Treasuries.

The reserve currency status and safe asset status are not the same thing, yet they are closely connected. In the paper, "Tariff war shock and the convenience yield of US Treasuries - A hedging perspective", the authors document the erosion of the convenience yield for long bonds because of the rising stock-bond covariance. They find that the rise in long-bond yields is associated with a deterioration in the convenience yield, driven by the withdrawal of safe-asset investors worldwide and a shift toward shorter-term Treasuries, which still serve as a safe asset. 

The data surrounding last year's tariff wars show a shift in perceptions of safety. Policy choices matter and will impact US credibility and reputation. Markets will look for other safe havens such as gold or shorter-duration Treasuries relative to traditional safe assets.

 

 

Investment management - like catching butterflies

The power to synthesize  "a vast amalgam of constantly changing, multicolored, evanescent, perpetually overlapping data, too many, too swift, too intermingled to be caught and pinned down and labeled like so many individual butterflies"... requires a "direct, almost sensuous contact with the relevant data, an acute sense of what fits with what, what springs from what, what leads to what"...This skill combines reason, emotion, judgment, and analysis  "so many individual butterflies".

- Quote from The Sense of Reality - Isaiah Berlin; from Sensemaking by Christian Madsbjerg 

The problem with investment management is that there is just too much data. It is coming fast and constantly changing. It is hard to keep up. That is the challenge, and we use data analysis to condense the information. The power of machine learning lies in its ability to process large amounts of data quickly and frame or provide context. We want to impose structure on this data, yet it defies control and requires models and thinking that constantly adapt.

The work of investment management - no glamour

 

"I am sojourning among the termites." - TS Eliot  commenting on his work as an employee of Lloyds Bank  

Yes, T. S. Eliot was a banker who took the train into the city every day and walked to his job. The work in investment management often involves sojourning among termites as we search for alpha, manage risk, build portfolios, develop models, and attempt to generate excess returns. There is no glamour, just a task that is reset every day.