Forget Taper, Real Deal for Bonds at Jackson Hole Is Inequality

(Bloomberg) -- What policy makers say about economic inequality at this month’s Jackson Hole symposium is potentially a bigger deal for bond investors than any taper talk, according to one market veteran.

HSBC Holdings Plc’s head of fixed-income research Steven Major said measures to address the growing gap between rich and poor could upend a key driver behind a multi-decade bull run for debt: that the well-off are more likely to invest their excess cash in bonds than spend it.

It’s a risk that many investors appear to be overlooking ahead of the annual conference for central bankers, Major argues, noting the official topic of the event this year is “Economic Policy in an Uneven Economy.” So far, the focus has been anticipating a possible reduction in the pace of bond purchases by the U.S. Federal Reserve.

“Investors should make sure it is not just chatter about the taper that they pay attention to,” Major wrote in a note dated Tuesday. “Rising economic inequality matters to bonds because it is one of the longer-run structural drivers that has contributed to rates being so low.”

Major’s call comes amid growing scrutiny from policy makers into how years of ultra-easy monetary policy are inflating asset prices to record highs while widening societal divides. The Gini index, a measure of income inequality, shows the wealth gap between rich and poor in the U.S. is now near the highest since records began in the late 1960s.

U.S. Federal Reserve Chair Jerome Powell, meanwhile, faces opposition from some progressives who don’t think he’s vocal enough on central banking’s impact on income distribution. The Bank of England’s asset-buying program has also been criticized by U.K. legislators for benefiting the rich.

Against this backdrop, Deutsche Bank AG analysts noted a jump in mentions of “inequality” in speeches by central bankers, a shift from their previous focus on inflation. Investors are also taking note, partly to fulfill environmental, social and governance (ESG) duties but also because of equality’s impact on market returns.

Earlier this year, analysts at Allianz SE’s Pacific Investment Management Co. said the prospect of decreasing inequality was a potential headwind to equity valuations. “Markets abhor equality to the extent that it stands in the way of rapid earnings and dividend growth,” they wrote.

Bigger Hit

Still, Major warns that suddenly raising rates and unwinding quantitative easing might not impact overall inequality trends, with the rich taking a smaller hit than those with minimal savings and large debts. Inequality between countries, too, might be exacerbated as emerging-market nations face higher debt-servicing costs.

“In theory, by driving a redistribution from capital to labor, there could be a reversal of the trend in the inequality risk premium,” he said. “Government policies may be better suited to dealing with inequality but they could also be disruptive, sparking a flight to quality and flows toward safer assets, such as government bonds.”

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