How to fix the International Monetary Fund | Leaders
The Economist Print edition / 2023-04-05 17:1151
EVER SINCE it was founded in 1944, the imf has had to get used to reinventing itself. Today, however, it faces an identity crisis like none before. The fund, whose annual spring jamboree kicks off on April 10th, is supposed to provide a financial safety-net for countries in distress. Yet, although the poor world is in the throes of the worst debt crisis in decades, the fund seems all but unable to lend. An extra $1trn has been committed to the IMF since the covid-19 pandemic began; however its loan book has grown by a paltry $51bn.

The fund is paralysed because it is a multilateral institution that aspires to represent the whole world, at the same time as being a club which is controlled by America and its Western allies. That worked when America was the world's dominant power and was intent on pursuing liberal internationalism. Now China is trying to build an alternative order and America is turning inward. Unless the fund acts soon, its ability to do its job as a crisis lender will be in question.

In its infancy the imf's main role was to promote balanced trade and manage the Bretton Woods system of fixed exchange rates. It was only when those arrangements collapsed that it shifted its focus to another of its missions: providing emergency cash, with strings attached, to countries in crisis. From the 1980s, and especially during the Asian financial crisis in 1997, the fund became known for its unyielding application of economic orthodoxy. In the 2010s it revised some of its views on austerity and capital controls, and tried to promote its softer side.

Today the fund's role as a crisis lender is both shrunken and less successful. Many big emerging markets have amassed vast quantities of foreign-exchange reserves to guard against currency crises. Some 30% of the fund's outstanding lending has gone to just one borrower, Argentina. The imf lends to countries like Egypt and Pakistan, which are strategically important to America. But these have gained licence to put off reform indefinitely; the fund has been urging Pakistan to mend its sales tax since at least 1997. And the imf is no longer the only crisis lender in town. Gulf countries including Saudi Arabia now offer emergency cash, often using obscure methods, say by depositing money at the borrower's central bank.

The main problem is that China has become a big creditor to the poorest countries, whose needs are small but urgent. Rising interest rates and the pandemic have left at least 21 in default or seeking debt restructuring, and many more look fragile. Yet China is reluctant to participate in debt write-downs, in part because it objects to the imf not bearing its share of losses—a vital safeguard for a lender of last resort. The fund has not overseen a single write-down involving China since the crisis started.

Without them, countries' finances may not be sustainable even as creditors are bailed out. America worries about imf funds flowing into China's pockets. Although many loans have been approved, most are supposed to be conditional on restructuring that has not been agreed on—much of the cash intended for Suriname, for example, has been in limbo for more than a year. As the fund has floundered, China has boosted its own emergency lending.

Together these trends risk making the imf irrelevant—just like another global institution, the World Trade Organisation, which has also been sabotaged, this time by America. With debt talks frozen, the fund is conjuring up new goals, such as lending to help with climate change. That has caused a turf war with the World Bank, which is better suited to project finance.

The fund does not need a new mission. It needs the ability to get tough on rogue creditors. For some the solution is for it to align itself explicitly with the West, perhaps by implementing restructurings that ban countries from ever again borrowing from unco-operative official creditors. But even if such a policy were credible, it would be a mistake to freeze out China entirely. Not only would it be against the spirit of the fund's mission, but if countries are forced to make a once-and-for-all choice between financial spheres, some may well choose China's.

Instead the imf should make borrowers suspend payments on their debts to obstructive official creditors for as long as a fund programme is active. That would circumvent and punish lenders that block restructuring, while leaving open a path to their participation should they decide to behave constructively. The IMF would remain open and global. It would not push China away, but save a seat at the table should it choose to take one. Such a strategy would echo the fund's inclusive approach to several communist states in the cold war.

Though the imf should not close itself off, the sooner it can bypass today's blockages, the better. Helping countries in crisis is much harder and less glamorous than it used to be. But it is still essential. ■

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Bills, Notes, Or Bonds?
por Tyler Durden

Zero Hedge / 2023-04-05 17:30294
Bills, Notes, Or Bonds?
Authored by Michael Lebowitz via RealInvestmentAdvice.com,

260 Fed meetings will occur between the issuance and maturity of a 30-year Treasury bond. There will be 260 times when the Fed raises, lowers, or does nothing with Fed Funds. In that perspective, why should a bondholder care what the Fed does or doesn't do at the next few meetings? We ask the question because we get many questions from potential bond investors on whether they should buy bills, notes, or bonds based solely on expected Fed policy.

Many inquiries are concerned about buying bonds too soon because they fear the Fed may still raise rates once or twice. While the Fed is an important variable in the performance of all bills, notes, and bonds, its actions significantly impact shorter-term bills and have less influence on longer-term notes and bonds. 

To better appreciate what drives yields across the spectrum of Treasury securities, we share some evidence on what factors influence bill, note, and bond yields. This exercise will help better assess which maturity bond may best serve your needs while effectively reflecting your economic and Fed outlook.

For a refresher on bond basics, we recommend reading our article Treasury Bonds FAQ. Additionally, watch our YouTube appearance, Bonds Explained Simply, with Adam Taggart of Wealthion.

Bond Market Lingo
Before moving on, it's worth a quick review of what constitutes bills, notes, and bonds.

Bills encompass all securities issued with a maturity of one year or less. They are sold at a discount to par and do not pay a coupon. Bill investors instead receive the difference between the purchase price and par at maturity.

Notes and bonds pay coupons and are initially auctioned at or very close to par. Bonds include all maturities of more than ten years, while notes include anything between one year and ten years.

Short-Term Bills Are Bets on the Fed
The shorter the bond term, the greater its yield is influenced by the Federal Reserve. Therefore, the most significant factor is the Federal Reserve if you are considering anything between a one-month and six-month bill. Of course, what the Fed does or doesn't do depends on economic data and the financial markets.

The graph below shows that 3-month Treasury bill yields are nearly perfectly correlated with the average of Fed Funds and the market implied forward Fed Funds rate (rolling three months Fed Funds futures contract).


For short-term bill investors, the most critical factor in deciding which maturity bill to buy is your expectation of monetary policy in the coming meeting or two.

If you think future expectations for the Fed Funds rate are too high, you are best served to lock in the longer six-month yield. Conversely, if you think they are too low, buy a shorter three-month bill and another three-month one in three months. If you are correct, your combined return will exceed the six-month yield. 

The equation below closely approximates the market's future yield expectation. In the example, we solve for rate A (a 3-month yield, three months from now). We assume a 5.00% 3-month bill and a 5.20% 6-month bill:

(3 X 5%) + (3 X A%) = (6 X 5.2%)

15           + 3 X A      = 31.2

3 X A =  31.2-15 = 16.2

A = 16.2/3 = 5.40%

If the future 3-month bill yields 5.41% or more, you are better off buying the 3-month bill and buying a second one when it matures. If not, the six-month bill is the better decision.

Long-Term Notes and Bonds
Unlike bills, notes and bonds better reflect longer-term economic and inflation expectations.

Treasury investors, like all investors, strive to earn a positive real return. Such means they should buy assets that provide a positive return after subtracting inflation. They want to increase, not decrease, their purchasing power.

Given what longer-term bond investors seek, they tend to focus more on the economy and inflation and less on what the Fed will do at the next one or two meetings. That said, Fed Funds are still a significant factor, as shown below. The graph below plots ten-year notes versus Fed Funds.



The R-squared (.75) is statically high but far from the near-perfect correlation we showed with 3-month bills. While the relationship is strong, there is a wide variance in the instances versus the trend line. If you recall, there was minimal variance in the 3-month bill vs. Fed Funds plot.

The following two plots show that ten-year yields have near equally strong relationships with three-year GDP and inflation trends. 



Yield Curves
The graph below compares the 3-month T-bill and 10-year note yields and their moving averages.



While both securities trend in the same direction, the change in the yield difference over time is volatile. To highlight better, we show below the 3-month bill/ 10-year note yield curve. The curve is the difference between the two yields.



We hope this is your aha moment. When buying a bill, note, or bond, the bet is on the Fed. But note and bond investors, unlike bill investors, also care about future economic trends. The sharp gyrations in the graph above make that abundantly clear. It also those gyrations that dictate relative returns for bills, notes, and bondholders.

Current Situation
The yield curve is currently inverted by 1.47%. Ten-year investors are willing to sacrifice one and a half percent versus what they could earn in a three-month bill. They make such an investment because, in time, they believe economic growth and inflation will be slower than they are today. As such, they are comfortable locking in 3.35% for ten years and passing on the opportunity to buy bills and make more for the next few months but possibly a lot less for the next nine years.

Further, if long-term bond investors are correct, the price of notes and bonds will appreciate much more than shorter-term notes and bills. If the two-year and ten-year note rates decline by 2%, the two-year note investor could see their price rise by about 3.75%. Ten-year investors should expect a 17% gain. For more on bond math and the potential gains of losses associated with yield changes, please read our article, Treasury Bond FAQ.

Summary- The Case for Long Bonds
We think the economy and inflation will revert to pre-pandemic trends. Such means GDP and CPI will be at or below 2%. As a result, Treasury note and bond yields will likely fall to similar levels. We like locking yields well above those rates for ten or more years. If correct, we may monetize the yield decline and re-invest the funds in riskier bonds, stocks, or another asset class offering higher returns when the time is right. The timing of such a trade may not be perfect. Still, in a disinflationary and slow economic growth environment, the long-term benefits of owning notes or bonds versus bills outweigh short-term price volatility and the opportunity cost of higher bill yields for another quarter or two.

Today, the Fed risks aggravating the banking crisis and a recession because they may have already raised rates too far. It is quite possible that even if the Fed hikes rates more, notes and bonds may fall in yield. Bond investors are looking ahead and realizing the higher the Fed goes, the more crippling the effects on the economy and inflation.

Tyler Durden Wed, 04/05/2023 - 10:20

Enviado do meu Galaxy