Watching some football and wanted to offer just a couple more random thoughts (in addition to what little offered yesterday) ahead of futures open …
First up, bonds on tap for what looks to me to be record third year of losses and while I love bonds more than they ever loved me, I gotta ask … where has the hedge functionality gone?
Bloombergs Weekly Fix: Higher for longer Fed sends bond yields soaring
… The surge in crude oil toward $100 a barrel isn’t helping on that front. And the central bank of central banks — the Bank for International Settlements — is warning that policymakers are entering a new and tougher phase in their fight to tame inflation. The International Monetary Fund said Europe’s policymakers can’t afford to cut rates next year, and may yet need to hike them again to control price pressures. All this as the outlook for world growth sours precisely because of the monetary tightening already delivered.
The result was that investors had almost no place to hide this week as assets declined across the board. The one exception, perhaps, was in cash — now offering the highest yields in a long, long time, without the risk of capital declines present in longer-term debt. We also got a reminder of just how much pain some investors have had to cope with as a US Treasury maturing in 2050 slumped to under 50 cents on the dollar for the second time in two months…
On this note and specifically, how important a part of ones portfolio bonds (ie the ‘40’ of 60/40) SHOULD be, if you are looking for a distraction FROM football (don’t know anyone who may be looking for such a thing but …), an interview from Danielle DiMartino Booth with Lacy Hunt is, well, MUST SEE TV.
Please enjoy and … yer welcome.
Finally, couple things from the inbox which may hold some funTERtainment value ahead of markets opening this evening …
Apollo asks - Are Credit Markets Focusing on Yield Levels or Credit Fundamentals?
The CCC spread in Europe is normally very highly correlated with the CCC spread in the US. But this relationship has changed after the Fed started raising rates, see the first chart below.
Spreads are currently pricing that Europe will have a recession with many defaults, but in the US, everything is fine.
The rally in the US relative to the EU has happened despite the consensus seeing a 60% probability of a recession in the US over the next 12 months and only a 50% probability in Europe, see the second chart.
The bottom line is that there is an inconsistency in pricing of lower-rated corporate credit in the US and Europe. We cannot both have that everything is fine and at the same time we are going into a recession.
The key question is why US credit has rallied so much despite the high recession probability. Given the relationship changed after the Fed started raising rates maybe the reason is what could be called a yield level illusion in US lower-rated credit, where investors focus more on the levels of yields than on the underlying fundamental credit risks of Fed hikes and permanently higher costs of capital.
In short, credit investors today should be asking themselves if spreads are focusing on yield levels or on credit fundamentals.
BNP - Sunday Tea with BNPP: Calm after the storm (this so called AFTER THE STORM — will it ever reach us here in the NY metro area? I could have sworn that pup and I saw the Ark float by this morning …)
KEY MESSAGES
We think the Fed may be over-optimistic on its growth outlook, and we like receiving 3y US swap rates.
We see scope for GBP weakness to extend as a technical investor positioning washout could leave the currency vulnerable.
The threat of domestic currency buying in Japan, Switzerland and Sweden may be the start of an emerging theme across developed markets.
… One catalyst for a turnaround in US yields stems from the fact that higher yields are proving increasingly punitive to risk assets (Figure 1). This sets up a backdrop that has historically seen sell-offs prove somewhat self-correcting. Additionally, strike as well as student loan and government shutdown risks (on the former, see US: Student loans sending consumers to detention in Q4, 21 September), while likely temporary in terms of their impact on the economy, could erode the perception of strong momentum.
MS - Sunday Start | What's Next in Global Macro: When the US Government Shuts Down...
The US government’s legal authority to spend on many items, including much of its operations, runs out on September 30. Congress is working on a deal to avoid the ‘shutdown’ that would follow. How’s it going? Not great. For investors, it’s time to prepare for this event, which means understanding what a shutdown does and doesn’t mean for markets. Our economists flag that a shutdown won’t matter much to growth if resolved within a couple of weeks, but it adds to factors that will likely drive a slowdown into 4Q. Hence, we think a shutdown could crystallize investors’ economic concerns, limiting risks of bonds continuing to underperform equities…
… 3. Still…it could create fresh pressure on markets to price in a slower US growth trajectory, limiting a further rise in US treasury yields: Although the shutdown’s economic effect could be modest, its timing may remind investors of other factors our economists have flagged that likely drive a slowdown into 4Q. In particular, the surprisingly large one-time effects of key summer events go away and the student loan repayment moratorium ends, likely directing some household income away from consumption. For example, our AlphaWise Consumer Pulse survey showed that among borrowers who were aware that the moratorium was ending, only 26% believed they could restart payments without cutting their spending. In short, our economists already see a material drag on PCE inflation in 4Q without a shutdown.
This could be an important driver for the US rates market, where my colleagues Matt Hornbach and Guneet Dhingra argue that the recent rise in rates reflected increased belief that stronger growth and more persistent inflation will lead the Fed either to hold rates at peak for longer than our economists forecast and/or hike further to a higher peak than our economists forecast. Whether or not that proves true, a 4Q reduction in both consumption and inflation could shift market expectations toward our economists’ more modest growth and inflation outlook. A lengthy shutdown could reinforce this shift, as a delay in the release of key economic data adds to investors’ uncertainty, given their need to track the evolving economic outlook and the Fed’s data-dependent path.
Bottom line – a US government shutdown alone is unlikely to weaken growth but clearly could remind investors of other more powerful growth headwinds, supporting our broad preference for bonds over equities.
Kindly refer to visual above of bonds underperformance AND THE VIDEO — do NOT yet give up on them as I have on EVER walking the dog without rain again …
PLEASE, please please send us the ‘AFTER THE STORM’ as walkin’ this guy …
… well, he’s not that into it. Truth is, he just hates the jacket and loves the rain … so much for that old saying ‘bout how there’s NO bad weather just bad clothing? .
THAT is all for now. Back TUESDAY (for any / all who observe, wishing you an easy fast … May you be sealed in The Book of Life) … Enjoy more rain, football and whatever is left of YOUR weekend …
A live look in at NJ politics,
Jersey Politics...LOL !!!!
I'm NO FAN of Central Banks or their Bankers, yet having fine folks like DDB, Lacy, and Powell working within their bowels gives 1 a shred of hope to cling to. Powell the easy punching bag deserves a LOT of credit; for he's the 1st fed chief since Volker to try to do the right thing w/monetary policy (w/o instituting the Gold Standard of course!). And he's trying to dispose of some of the Malinvestments out there. However, I greatly fear the commies who Dark Brandon snuck onto the FOMC board w/his Dirty Pool tricks are lying in wait patiently, for their turn to run roughshod over Powell's hard work.