October 3. Low anxiety
–It was late 2015, early 2016 when the energy rout was causing high-anxiety in the high-yield market and in stocks in general. The Fed had passed on a hike in September 2015 because of emerging market volatility. At the time, the decline in energy prices and related suppression of inflation was considered a “one-off” event. Indeed, in December the Fed initiated the first hike. High yield and EEM (emerging mkt etf) bottomed in early 2016. “I got better.”
–Currently oil is making new highs. An article in BBG has this quote: “A dearth of fresh supply, as well as continued investor inflow and rising US government debt yields, helped push the yield spread on sub-investment grade US bonds over benchmark treasuries to 3.09 percentage points Monday – the lowest since July 2007.”
While there is currently some degree of stress in EM, it’s less than 2016. However, the current oil market rally may not be ‘one-off’. Additionally, the percentage of investment grade debt hovering just over junk ratings is at its highest levels. Grant’s posted an article yesterday “They ate the cake”, outlining risks to high levels of private equity debt. They might be eating cake, but it’s not coming in a Blue Apron box, which closed at 1.47 yesterday from an IPO price around $10 a little over a year ago.
–In 2007/8, it was an avalanche of mortgage rate resets that tipped the apple cart. Then, as now, the Fed’s hiking campaign operated with a lag. Tight corporate spreads indicate that problems are somewhere off in the future, and certainly the new DJIA high reflects an economy that Powell refers to as bright.
–Treasury yields eased a couple of basis points yesterday and the curve flattened. Volume was low. Commodities had a nice bounce. Today Italy is backing off on its budget, apparently scaling back to 2% of GDP, which is alleviating a source of concern. Today’s US news includes ADP and Service ISM, expected 58 from 58.5.
