TheChek News Flow

Policymakers step up concerns over impact of bets on bonds

The world’s most powerful financial policymakers have singled out a group of hedge funds as a potential source of instability for financial markets, in a marked escalation of existing concerns about the impact of their bets on bonds.

The Financial Stability Board, comprised of the world’s top finance ministers, central bankers and regulators, on Wednesday warned that part of the hedge fund industry had “high synthetic leverage in general”.

The role played by hedge funds and other financial institutions such as asset managers and pension funds in bond markets has come under increased scrutiny since March 2020, when US government bond yields dramatically increased as demand evaporated.

The default of Archegos Capital Management in 2021 also underlined how leverage could cascade through markets and the banking system when the fund’s series of highly concentrated bets on share price moves soured.

Markets remained “vulnerable” to “further liquidity strains” from so-called non-bank financial institutions, the FSB noted. However, it added, “Within the hedge fund sector, there is a group of funds, typically pursuing macro and relative-value strategies, with very high levels of synthetic leverage,” without naming any institutions.

Synthetic leverage is used to boost returns or hedge positions and created using derivatives or other complex financial instruments, which are often held off balance sheets. Regulators find it more problematic to evaluate than outright borrowing because it is more difficult to measure institutions’ exposures and liabilities can rise quickly.

Macro hedge funds take bets on direction of assets or interest rates. Relative-value ones aim to exploit market inefficiencies such as the difference between the price of futures contracts and the underlying asset.

Hedge funds’ leveraged bets on bonds were blamed in March 2023 for exacerbating another spate of turmoil in US Treasuries, prompting Securities and Exchange Commission chair Gary Gensler to tell the Financial Times that funds should face higher scrutiny.

Still, even as regulators threatened greater oversight, exposures continued to grow in some areas of the market. A paper published by the Federal Reserve last week showed that hedge funds’ notional short positions in five- and 10-year US Treasuries were above all-time highs as of May 9.

The FSB added that hedge funds could also have “hidden leverage” because they typically borrow from several prime brokers to increase the size of their bets. “Furthermore, a few prime brokers dominate the provision of lending to hedge funds, and this concentration could amplify shocks and propagate them through the financial system,” the FSB added.

An executive at a firm that specialises in similar trades argued that hedge funds have “overfished” in the market, and warned that regulatory caps on the amount of leverage these funds can access through the repo market will be next.

The FSB has already begun work on leverage in non-banks and on Wednesday said the area would be a “key area of policy focus in 2024”.

It wants to address “the most salient data gaps” on the exposures of non-bank financial institutions, potentially by pulling in information from trade repositories and from the banks providing them with leverage.

It also wants measures to contain “excessive leverage behaviour”, which could include higher requirements for haircuts and margins on derivatives and securities financing transactions, as well as “measures to enhance prime brokers’ risk management and improve the liquidity preparedness of non-bank investors”.

Use of alternative fuels will allow companies to keep selling combustion-engine models into the next decade, say executives

So-called e-fuels are set to play a key role in the future of the European automotive industry, according to several of the region’s carmakers, as they believe a concession from Brussels over the alternative fuels will allow them to keep selling combustion-engine vehicles into the next decade.

Under pressure from Germany and Italy, the European Commission this year said cars that run on fuels made using carbon captured from the atmosphere could be exempt from a planned ban on sales of combustion-engine cars from 2035.

Speaking on the sidelines of the biennial Munich motor show, executives from BMW, Renault and Mercedes-Benz said e-fuels, which are not yet commercially viable, were a pragmatic solution in their quest to cut emissions.

Mercedes-Benz previously announced an “ambition” to stop selling combustion engines where market conditions allow by the end of this decade.

Nevertheless, the Stuttgart-based company’s chief executive Ola Källenius told the Financial Times it was not putting “a final stop date” to combustion engines. The company was “ready” to sell fully electric cars when required by customers but wanted to maintain “tactical flexibility” right up until its target to become fully carbon neutral by 2039.

“This is a journey of many years and our production plans are flexible, so we can flex between electric and combustion,” he said.

Many industry executives have argued that less polluting fuels will be essential to reduce emissions from old cars in the future, but critics fear they will delay EU plans to phase out the combustion engine by 2035. The electric vehicle campaign group Transport & Environment has called the exemption on e-fuels a “Trojan horse” for fossil fuels.

Electric vehicle makers at the motor show were also critical of the companies supporting concessions for e-fuel-powered cars.

“A year ago we were beyond this and now we are back in that silly discussion about if electric mobility is really important,” said Thomas Ingenlath, chief executive of EV brand Polestar. “The longer you discuss it, the more you will lose the chance to actually be still relevant in the future.”

However, BMW’s chief executive Oliver Zipse said Berlin would “never have agreed” to EU plans to completely phase out petrol and diesel cars without the inclusion of an exemption for e-fuels.

He also questioned whether the EU would end up banning sales of new combustion-engine cars by 2035, pointing to its plans to review progress with challenges such as rolling out EU-wide charging infrastructure and securing raw battery materials in 2026. “You wouldn’t do a review if legislators were certain that everything was in order,” Zipse said.

Renault’s technology chief Gilles Le Borgne said the concession on e-fuels could “open the door” for longer use in the French carmaker’s hybrid models in future and urged regulators to remain “technology neutral” when setting the rules.

“We need to be open-minded on technology, we must not [have the technology] imposed,” he told the FT. “That would be a disaster.”

He added that e-fuels should be used in older vehicles to help lower their emissions. “This is the only way to fix the current fleet,” said Le Borgne. “If you don’t have any e-fuels, you will never fix the current fleet.”

The technology behind alternative fuels such as e-methane or e-kerosene, which are made with captured CO₂ and hydrogen produced from renewable or low-carbon electricity, is still in its early stages.

Carmaker shows off new version of vehicle used by the emperor, currently sold only in Japan

TOKYO—Toyota Motor TM 1.64%increase; green up pointing triangle thinks the world outside of Japan may finally be ready to embrace its six-figure superluxury flagship car.

Toyota’s Century—often described as the Rolls-Royce of Japanese cars—is frequently chosen by corporate chieftains and government leaders in Japan, including the emperor.

Since it made its debut in 1967, the Century has been sold almost exclusively in Japan, where Toyota handmakes a few dozen a month and vets potential buyers. The model has changed little from its original boxy sedan shape and classic styling.

On Wednesday, Toyota showed off a new, larger, plug-in hybrid version of the model. It will be introduced this year and offered to customers anywhere in the world, Executive Vice President Hiroki Nakajima said. At a suggested retail price in Japan equivalent to $170,000, the new Century costs more than its previous sedan iteration, which sells for around $140,000.

With its new Century, Toyota is chasing sales in two segments—larger and luxury vehicles—that have continued to grow despite stagnation elsewhere in the car market. In 2022, global sport-utility vehicle sales grew 3% from a year earlier despite a slight decline in overall car shipments. That was due in part to strong demand for the vehicles in the U.S., India and Europe.

Demand for luxury cars has also continued to rise through recent economic uncertainties. Consulting firm McKinsey estimates that luxury car sales will grow as much as 8% to 14% annually through the early 2030s, in contrast with its forecast for little to no growth in the mainstream car market over the same period.

Restrictions on foreign devices are the latest step in Beijing’s campaign to reduce reliance on overseas technology and could hurt Apple’s success in the country

BEIJING—China ordered officials at central government agencies not to use Apple’s AAPL 0.13%increase; green up pointing triangle iPhones and other foreign-branded devices for work or bring them into the office, people familiar with the matter said.

In recent weeks, staff were given the instructions by their superiors in workplace chat groups or meetings, the people said. The directive is the latest step in Beijing’s campaign to cut reliance on foreign technology and enhance cybersecurity, and comes amid a campaign to limit flows of sensitive information outside of China’s borders.

The move by Beijing could have a chilling effect for foreign brands in China, including Apple. Apple dominates the high-end smartphone market in the country and counts China as one of its biggest markets, relying on it for about 19% of its overall revenue.

It wasn’t clear how widely the orders were being distributed, but similar messages were communicated to employees at some central government regulators.

China’s State Council Information Office and Apple didn’t immediately respond to requests for comment.

Beijing has for years restricted government officials at some agencies from using iPhones for work, but the order has now been widened, the people said. The latest order also signals an intensified effort by Beijing to ensure its rules are strictly enforced.

China’s restriction mirrors similar bans in the U.S. against Huawei as well as against officials using Chinese-owned TikTok, with both superpowers concerned about data leaks amid heightened emphasis on national security as relations hover near decadeslong lows.

Chinese leader Xi Jinping has been emphasizing national security as its rivalry with the U.S. intensifies, leading to a tightening of state control over data and digital activities in recent years. In July, China started implementing an expansive update of an anti-espionage law.

Beijing has been urging its agencies and state-owned enterprises to replace foreign technology including computers, operating systems and software with homegrown products they deem safe and controllable.