Sunday, October 23, 2016

Highlights from The Economist this week

On the effects of police wearing body cameras:

"A study published in September by researchers at the University of Cambridge suggested that body cameras can dramatically reduce the number of complaints made against the police. Over the course of a year almost 2,000 officers, in four forces in Britain and two in America, were randomly given cameras. Compared with the previous year, the number of complaints brought against them dropped by a stonking 93%." 

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Key points on the transformation of the bond market: 

* The market is dominated by forced buyers with no real interest in maximising the return on their portfolios:

- Central banks (QE bond buying - trillions of bonds bought)
- Pension funds and insurance companies, which buy government bonds to match their long-term liabilities. Neither group has an incentive to sell bonds if yields fall; indeed, they may need to buy more because, when interest rates are low, the present value of their discounted future liabilities rises.
- Banks, too, play an important role. They have been encouraged to buy government bonds as a “liquidity reserve” to avoid the kind of funding problems they had in the 2008 crisis. They also use them as the collateral for short-term borrowing. 

* With so many forced buyers, trillions of dollars-worth of government bonds are trading on negative yields. “When you have so many price-insensitive buyers, the price-discovery role of the market doesn’t work any more,” says Kit Juckes, a strategist at Société Générale, a French bank.

* “It’s about the return of capital, not the return on capital,” says Joachim Fels, Pimco’s chief economist.
..investors have been forced to take more risk in search of a higher return. They have bought corporate bonds and emerging-market debt. And in the government-bond markets they have bought higher-yielding longer-term debt.

 * In short, as Mr Juckes puts it, the bond market is “brittle”. It is priced for a world of slow growth and low inflation, leaving no margin for error if things change. The most intimidating thing about the modern bond market now is the risk that they do.



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