4/16/2023 0 Comments Goldilocks economy usa![]() ![]() “There is a collision waiting to happen between market expectations of a Fed rate cut later in the year and the growing evidence of a global economic recovery that may keep inflation high so might not lead to a reversal in Fed policy,” said Bruce Clark, senior macro strategist at Informa Global Markets.Ĭorporate spreads seem "rich," or over-valued, because they do not fully account for the risk of a recession or economic slowdown where the Fed may not be as accommodative in its policy as in previous downturns, said Dan Krieter, director (FI Strategy) at BMO Capital Markets. Money markets bet the Fed will start cutting rates towards the end of the year, while Fed officials forecast interest rates to remain higher for longer. (Graphic: Investment Grade CDS Index - (1).png) ![]() Spreads on investment grade bonds widened for the first time this year last week, though only marginally, and an index of credit default swaps - a derivative some investors use to either hedge their positions or to short credit - rose last week for investment grade debt. By comparison, economists polled by Reuters last month put a 60% probability on a recession taking place in 2023.īehind the risk-on approach was optimism about the macroeconomic outlook: Easing inflation, accompanied by signs of a weakening but resilient economy, leading to a so-called soft landing where the Fed tames price pressures without pushing the economy into a recession.īut that theory is getting pushback from some investors, and price moves in recent days have started to reflect some caution. ![]() investment grade bonds rated BBB implied a 30% chance of recession, and CCC rated bonds implied a 35% chance. This puts the credit market at odds with economic forecasts and the rates market," Barclays strategists said in a recent note. "Credit spreads have rallied across the board since the beginning of the year despite heavy (new bond) issuance and are at multi-month tights. But this tightening spree may be nearing an end, said analysts and investors. ![]()
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