Beware of Quantitative Tightening

In our view, the current risk pricing environment for high-quality assets is quite extraordinary in a historical context. Pricing for sovereign credit, high quality corporate and financial credit and other high-quality defensive assets is at, or near, record highs at present. The pricing of high-quality assets reflects the prevailing environment of ultra-low policy rates and massive Quantitative Easing programmes over the past eight years by the 4 major central banks. The question we all need to ask ourselves is whether asset prices predominantly reflect the current economic reality of lower growth and inflation, or are they being significantly distorted by the extraordinary monetary policy (including asset buying) and foreign exchange policies of the G7 Central Banks? We believe as central bank asset purchases diminish over the coming years, there is potential for material price declines in some assets. We refer to this reversal as Quantitative Tightening (QT). It is likely that we have seen the first “canary in the coal mine” of QT. Read the full report: (VIEW LINK)