| Welcome to The Weekly Fix, which stands for the rights of all pigeons, more than six feet away and with a mask. --Emily Barrett, Asia FX/Rates editor. Capricious CurveThe yield curve's fame has gone to its head. Maybe it's those decades of correctly forecasting recessions (a trick that may only have worked this time because we got a pandemic). Now, the curve is more mercurial than a celebrity relationship. Ahead of the election it was steepening, then not, as the realities of a likely split Congress and some harrowing data on the virus and economic shutdowns sank in. Then it's back on with Georgia, stimulus, and taper talk...but some Fed pushback and decent auctions and it's off again. We expect this sort of stuff from stocks. This is the bond market, darn it. The flip-flopping is a strong signal in itself -- there's a lot still standing in the way of this reflation trade. We talked last week about the forces that continue to curb U.S. yields, so we won't revisit in detail now. But recent events raised two further objections to the case for the back end of the curve to rear up much more. 1) The Federal Reserve's most senior officials have nixed speculation that the central bank could start trimming its bond purchases as soon as this year. Fed Chairman Jerome Powell stomped on the curve with the comment Thursday: "We know we need to be very careful in communicating about asset purchases...Now is not the time to be talking about exit. I think that is another lesson of the global financial crisis, is be careful not to exit too early."
That echoed a similar sentiment from Vice President Richard Clarida this week. And Governor Lael Brainard slapped down any suspicion that the Fed might already be wavering in its commitment to allowing inflation to run hotter -- stressing that the Fed's inflation goals are reflected in its guidance on asset purchases. And as a reminder of the inequalities the Fed is striving to address with its new strategy, she had this: "Federal Reserve staff analysis indicates that unemployment is likely above 20 percent for workers in the bottom wage quartile, while it has fallen below 5 percent for the top wage quartile."
2) Perma-bulls Hoisington are still rooting for Treasuries -- the 30-year, to be specific, since, as they drily put it, "a secular inflation cycle is not at hand." The bond market veterans explained why in their quarterly outlook released this week: "First, the massive void in economic activity and destruction of wealth created by the virus and related shutdowns of businesses in the U.S. and abroad will take years to fill. Second, U.S. fiscal multipliers are generally negative, rendering much government spending counterproductive in terms of stimulating economic growth. Third, monetary policy becomes much less impactful since the debt overhang was massive before the pandemic and is now even worse, not just in the United States but in virtually all parts of the world."
With a new pandemic relief plan now on the table, and an infrastructure spending pitch in the pipeline, the Democrats are going to do the best they can with that second argument. Though it's worth noting that the release of the $1.9 trillion aid proposal on Thursday has left the yield curve so far unmoved from its levels a week ago. Asia's Stealth TaperU.S. reflation and its implications are eyed warily across the developing world. There was an almost audible sigh of relief as the Fed defused the taper-bomb. This combination of big fiscal policy and easy monetary policy is, as Guy LeBas of Janney Montgomery Scott noted on Twitter, "rocket fuel for risk assets." That should support emerging markets even as U.S. Treasury yields climb further above 1%. Nevertheless, some global investors are already looking twitchy. Fidelity International has trimmed its overweight in emerging-market bonds, and Morgan Stanley this week shifted from bullish to neutral on currencies. That's despite the apparent calm in volatility measures so far, with the JPMorgan EM FX indicator looking unperturbed.  And Asia's credit default swaps market is similarly tranquil.  Barclays analysts said while the rise in U.S. yields has hit year-to-date total returns of EM credit and local bonds, "a positive global risk backdrop usually leads to positive returns across EM asset classes, even if UST yields increase."
It's also a favorable backdrop for economies that are leading the global recovery to start cautiously unwinding their emergency policy settings. Those that ventured into asset-purchase programs themselves may well want to beat the Fed to the taper. A gradual pullback appears to be underway in parts of Asia. China this week unexpectedly drained cash from its financial system for the first time in six months, in line with repeated signals from authorities of the need to wean markets off the measures that supported them through last year's crisis.  As China's economic recovery gains firmer footing (next week's GDP data are expected to show China's economy expanded 6.2% on the year in the fourth quarter), the focus has shifted from stimulus to preventing an excessive buildup of leverage. The country's debt surged to a record 277% of total output in August, stoking further financial stability concerns. The effects are already showing. China's credit growth moderated in December, with shadow banking activity falling by the most in at least four years. Policy makers are also at pains to show that they're not ripping off the band-aid, as any sudden moves could spark volatility in key rates and funding markets. India's central bankers took their first step back toward business as usual Friday with the first 14-day operation to siphon cash. The operation is necessary mainly to help key money market rates recover from their slump. Despite the Reserve Bank of India's emphasis on a "phased process," in announcing the move last week, short-dated bonds sold off and the government's short-term borrowing costs rose. The RBI then sought to assure executives of the large banks this wasn't a step to tighten policy, our reporter Subhadip Sircar wrote this week. And in New Zealand, the central bank announced its first bond buying exercise of 2021 for next week at NZ$650 million ($467 million), down from NZ$800 million at its last round in December. So the taper is making stealthy progress, but may take a long time yet to make its way to the world's largest market. Bonus PointsFund managers donated $1 million to GOP election deniers
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