A Reuters mini-essay from Joachim Klement whose substack tagline is:
Thoughts on financial markets by a grumpy, middle-aged German. What more do you want? Click to read Klement on Investing, by Joachim Klement, a Substack publication with tens of thousands of subscribers.
From Reuters, February 15:
Chatter about the “dollar debasement” trade has become omnipresent, but one measure of risk suggests that investors are getting it all wrong. They are overestimating the trouble the dollar faces while underestimating the threat to U.S. Treasuries.The dollar has depreciated against all major currencies over the last 12 months, while gold and other precious metals have sky-rocketed, recently hitting all-time highs. Does that mean we’re seeing debasement in action? Not necessarily, or at least, it’s not that straightforward.While the term “debasement trade” is ill-defined, it appears to consist of two elements. On one side, investors are worried about a devaluation of the U.S. dollar if discontent with U.S. policy – whether fiscal or foreign – makes money managers reduce their exposure to the greenback, meaning it might no longer act as a safe haven and could even lose its status as the world’s reserve currency.From the other perspective, investors are concerned that the U.S.’s eroding fiscal situation may eventually trigger a sharp devaluation of U.S. Treasuries – or, in extreme scenarios, a default – and a corresponding devaluation of the U.S. dollar.On the face of it, the case for both seems pretty weak. The dollar declined around 10% last year, but that was after it rose by roughly 50% in the prior decade, and it’s nowhere near losing its status as the world’s reserve currency.Meanwhile, Treasury yields are hardly ringing alarm bells.But there’s another way to measure whether investors are growing more skittish about holding dollars or Treasuries: their so-called “convenience yield”. This is essentially the difference in yield between holding the U.S. dollar or Treasuries outright and creating synthetic versions of these assets via a series of currency and options trades.Investors may do the latter because they need Treasury exposure but either don’t want to take on the credit risk of the U.S. as a counterparty or own government bonds from other countries that they cannot sell.Creating a synthetic dollar or Treasury is cumbersome, so the replications should offer higher yields.If the investors conducting these trades – typically among the most sophisticated in the world such as hedge funds and central banks – were afraid of dollar debasement, we should observe a declining convenience yield.And we’re not, at least not if we’re looking at the dollar. The convenience yield for the greenback against the euro has remained stable for the last ten years and has stayed in positive territory, meaning investors would rather hold dollars than replicate them....
....MUCH MORE
Here's his substack:
https://klementoninvesting.substack.com/
