Lytle Michael John Tabula ETF

Tabula IM warns of threats of illiquid bond markets and growing inflation uncertainty

Tabula : Investors told to hope for the best but prepare for the worst: dual threats of illiquid bond markets and inflation uncertainty grow

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Michael John Lytle CEO of Tabula Investment Management

European fixed income ETF provider Tabula Investment Management Limited is telling investors to hope for the best but prepare for the worst, warning of the potential double threat from lower liquidity in the bond markets at year end, and a change to the decade-long trend of low and stable US inflation.

Tabula warns that bond markets often see lower liquidity towards year end, as the sell-side prepares to slim balance sheets and the buy-side closes its books, but uncertainty this year means liquidity could prove worse than in recent history. Meanwhile, while inflation forecasts vary widely, fiscal stimulus which should be supported by the incoming Biden administration is likely to increase inflationary pressure.

“The current slew of negative factors means markets may experience more than just a seasonal liquidity slump this year,” says Tabula CEO Michael John Lytle. “As European lockdowns ease there is a risk of a third wave of cases in the middle of winter. President Trump’s resistance to the election result also remains a wildcard and expectations of worsening economic data is beginning to grow. All of these have the potential to temper the recent vaccine-led relief rally. It seems like we have had all the good news.”

Inflation is also an escalating concern among institutional investors. The US Federal Reserve has committed to a new inflation regime, allowing inflation to run ahead of its historic 2% target, and the President-elect will likely be more supportive of an accommodative monetary policy. Biden’s pick for Treasury Secretary of ex-Fed chair Yellen suggests a close tie-up between fiscal and monetary authorities. Tabula warns that these factors, combined with the demand/supply fallout from COVID-19, mean that inflation is once again on the agenda.

“This year, we have witnessed extraordinary monetary stimulus, which when combined with loose monetary policy, introduces impetus for future inflation,” says Michael John Lytle. “The Federal Reserve Board balance sheet has doubled in six months, and global narrow & broad money supply are up 22% and 14% respectively this year – annual growth rates last seen in 1993 and 2008 respectively. Changing Central Bank mandates and new fiscal policies are also putting pressure on inflation. The incoming Biden administration is committed to further COVID-19-related stimulus, including more direct payments to households. This, combined with what the Fed does next, could significantly affect the outlook for US inflation” said Lytle.

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