After failing to worry sufficiently in the bubble years, bankers are trying to make up for lost time. We have to find something to worry about. Faced with a global economy in much better shape that any of us expected this time last year, and market conditions conducive to positive returns (steep yield curves, cheap money) the best we can do for a worry is government deficits.

You can’t read the FT without getting sweaty palms about the immense deficits in the US and the UK.  Is this the biggest worry we have? I think we have to do better than that. Investors positively demanded government bonds in 2009, driving rates down to record lows. Of course it makes sense for governments to issue bonds, and lots of them.

If Bill Gross’ appetite for gilts is satiated and Chinese state agencies have had enough treasuries, then they will sell their bonds and buy something else. That is not a bad thing. If their flows into the equity markets, corporate investment and bank recapitalisation will be stimulated, this is a good thing. If Chinese money is repatriated, the renminbi will tend to appreciate, and that is a good thing.

Some bond vigilantes see themselves as fighting back, “yanking the chain” of government officials who have been giving bankers a hard time lately, using dire warnings of funding crises as a way of encouraging officials to speed their exit strategies, not only from support mechanisms but from holding equity stakes in banks themselves.

Banquo is paid to worry, but my worry isn’t government deficits, it is why so many investors can’t think of anything better to invest in than another government deficit.

Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.


This blog is no longer updated but it remains open as an archive.

Banquo has spent more than 20 years in investment banking and the hedge fund industry, splitting his time between London, New York and Geneva.

Why is Banquo anonymous? Because he operates at a senior level across the financial markets, advising and investing, buying and selling, hiring and firing. He's still in the game but if he has a relevant financial interest in the subject of his posts, you'll know about it. Being anonymous keeps things simple. Banquo will never betray a confidence although he is privy to many.

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