– Christopher Demasi

 

Central banks globally have clearly been buying a lot of government bonds over the last decade. But just how much the world’s central banking powers own of their government’s stock of financial obligations is astounding. And that includes the US Federal Reserve. 

Last year when we spent time in various cities and regions talking to clients, advisers, and friends, we would point to Japan as a case of a central bank becoming extremely involved in the financial markets. In particular, the Bank of Japan (BoJ), was the largest owner of Japanese government bonds and equity exchange traded funds (ETFs). This situation has become even more extreme this year and the BoJ now owns close to half of the government’s debt.

But BoJ’s friends around the world are catching up. The European Central Bank (ECB) and Bank of England (BoE) have increased their respective holdings of government borrowings to 30%, up from low 20% levels earlier this year.

Perhaps the most remarkable move has been in the US. The US Federal Reserve (Fed) owns almost a quarter of the US government’s obligations, around double the level it started the year. That comes after the Fed’s influence in the US government bond market had been steadily decreasing for more than five years.

When the central bank steps in to buy the risk-free asset in an economy, private investors trade their holdings for cash. That cash must be redeployed, and it finds its way into risk assets, first corporate bonds (which the Fed is also buying) and then it can leak into equities. While we remain concerned about the potential for a strong economic rebound, there are other market participants that vehemently argue a “V-shape” recovery is happening. The resolution of that debate may not matter nor be driving markets now. The flood of central bank liquidity has proven far more powerful in the short term even if we believe economic fundamentals remain highly uncertain with the potential for continued repression. We think it is prudent to stay cautious and patient, including employing capital protections in our strategies for our investors. 

 

Chris Demasi is a Portfolio Manager with Montaka Global Investments.
To learn more about Montaka, please call +612 7202 0100.

Our Montaka Long Only funds strive to act as a core, high conviction, global portfolio holding. Consistent with the long portfolios in our Montaka Variable Net funds, this offering is focused on owning the world’s high quality, undervalued businesses – and cash when appropriate – to outperform its benchmark.

Our Montaka Active Extension funds strive for maximised return over the long-term. Owning the Montaka Variable Net long portfolio typically scaled up to approximately 130 percent - and the Montaka Variable Net short portfolio typically scaled down to approximately 30 percent – this these funds results in a net market exposure of approximately 100 percent most of the time.

Our Montaka variable net funds strive for significant downside protection – but with minimal upside reduction. Focused on owning the world’s great and growing businesses when they are undervalued, while managing a portfolio of short positions in businesses that are deteriorating, misperceived, and overvalued, this these funds are our flagship long-short.

Our
Funds

Our Funds

Our Montaka Long Only funds strive to act as a core, high conviction, global portfolio holding. Consistent with the long portfolios in our Montaka Variable Net funds, this offering is focused on owning the world’s high quality, undervalued businesses – and cash when appropriate – to outperform its benchmark.

Our Montaka Active Extension funds strive for maximised return over the long-term. Owning the Montaka Variable Net long portfolio typically scaled up to approximately 130 percent - and the Montaka Variable Net short portfolio typically scaled down to approximately 30 percent – this these funds results in a net market exposure of approximately 100 percent most of the time.

Our Montaka variable net funds strive for significant downside protection – but with minimal upside reduction. Focused on owning the world’s great and growing businesses when they are undervalued, while managing a portfolio of short positions in businesses that are deteriorating, misperceived, and overvalued, this these funds are our flagship long-short.