Leverage.

The return of.......unfunded liabilities.

1. Leading economies are close to “tipping” into a high-inflation world where rapid price rises are normal, dominate daily life and are difficult to quell, the Bank for International Settlements warned on Sunday. In its annual report, the BIS, the influential body that operates banking services for the world’s central banks, said these transitions to high-inflation environments happened rarely, but were very hard to reverse. Diagnosing that many economies had already embarked on the process, the BIS recommended that central banks should not be shy of inflicting short-term pain and even recessions to prevent any move to a persistently high-inflation world. Agustín Carstens, BIS general manager, said: “The key for central banks is to act quickly and decisively before inflation becomes entrenched.” The BIS annual report is here. (Sources: ft.com, bis.org)

---

2. Aggressive interest rate rises from the world’s central banks risk triggering a financial crisis in the unregulated shadow banking sector, the Bank for International Settlements has warned. The BIS has rung the alarm over the consequences of rapid monetary tightening being carried out by the US Federal Reserve and replicated across western economies including by the Bank of England. Claudio Borio, head of the BIS’s monetary and economic department, told The Times that shadow banks, which can include hedge funds, private equity firms and pension funds, faced a liquidity crunch that could trigger a chain of corporate bankruptcies as central banks raised borrowing costs to fight inflation. “There is a hidden liquidity mismatch which erupted in March 2020 and we cannot rule out further possibilities of strain in the shadow banking sector,” Borio said. “That could put central banks in a position of tightening monetary policy on the one hand, and, if stress emerges, to handle a [shadow banking] crisis with more liquidity, on the other.” (Source: thetimes.co.uk)

---

3. U.S. public pension funds don’t have nearly enough money to pay for all their obligations to future retirees. A growing number are adopting a risky solution: investing borrowed money. As both stock and bond markets struggle, it’s a precarious gamble. More than 100 state, city, county and other governments borrowed for their pension funds last year, twice the highest number that did so in any prior year, according to a Municipal Market Analytics analysis of Bloomberg data. Nearly $13 billion of these pension obligation bonds were sold last year, which is more than in the prior five years combined. The Teacher Retirement System of Texas, the U.S.’s fifth-largest public pension fund, began leveraging its investment portfolio in 2019. Next month, the largest U.S. public-worker fund, the roughly $440 billion California Public Employees’ Retirement System, known as Calpers, will add leverage for the first time in its 90-year history. While most pension funds still avoid investing borrowed money, the use of leverage is spreading faster than ever. Just four years ago, none of the five largest pension funds used leverage. (Source: wsj.com)