Governments have traditionally argued that as long as debt remains manageable and serviceable without difficulty, there’s little cause for concern. While this notion holds some truth, the reality is that recent growth has largely been fueled by an insurmountable increase in debt.
We are now 18 months into the Fed’s tightening cycle and many market participants, including us, have been surprised by the resilience of credit spreads, particularly in the high yield (HY) market where the option-adjusted spread for the Global HY index has dipped to the low 400s (bps), one of the tightest levels of post Global Financial Crisis observations.
Hawkish stances risk overtightening and causing recession
During this Fed hiking cycle emerging markets have been split into two camps.
For a long time, it has made no sense to keep money under your mattress or invested in cash-like instruments (short dated, fixed return) such as money market funds, without facing an inflation-adjusted loss.
A brief press release recently from Europe’s largest and possibly oldest industrial manufacturer, announcing a short-dated, small-sized bond, seems hardly significant. In time however it may come to be seen as heralding a transformation of bond markets.
Yields are appealing in select markets and buying opportunities exist, but investors will need to be mindful about volatility.