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US Treasury yields moved higher, led by the short-end with 2Y and 5Y yields up 4-6bp. The peak Fed funds rate was unchanged at 4.92% for the June 2023 meeting. The probability of a 25bp hike at the FOMC’s February 2023 meeting now stands at 94%, almost unchanged since Friday. US equity markets ended higher with the S&P up 0.4% and Nasdaq up 0.7%. US IG and HY CDS spreads were 0.3bp and 0.4bp tighter. The earnings season kicked-off on Friday with US banking majors BofA, JPMorgan, Citi and Wells Fargo reporting results – all banks increased provisions for possible defaults, in preparation for a “mild recession” as noted by JPMorgan and BofA CEOs.
European equity markets ended lower. The European main and crossover CDS spreads widened by 1.1bp and 6.4bp respectively. Asian equity markets have opened mixed today. Asia ex-Japan CDS spreads tightened by 0.5bp. China’s new home prices dropped 1.5% YoY in December, an eighth straight month of declines as the Covid outbreak hurt demand.
Payment-in-kind (PIK) is a type of bond for which, on each coupon payment date, the accrued coupon is capitalized and fully or partially paid in the form of additional bonds or added to the principal amount. PIK bonds are typically bonds with deferred coupons. These are riskier for investors due to more credit risk with respect to the PIK interest amount, payment of which can be deferred until maturity. Given this inherent higher risk, interest rates for PIK bonds are higher than for conventional bonds. Generally, issuers with liquidity stresses that are able to pay coupons in non-cash form issue these notes.
On Bond Investors at a Crossroads With Fed Pause In Sight
Ed Al-Hussainy, rates strategist at Columbia Threadneedle
“The market has discounted all the Fed’s language about pushing the terminal rate higher than 5%… Most of the risk premium in the long end of the curve reflects inflation and if it comes down faster, or even at the current pace, there’s a big runway for the long end to reprice”
Jason Pride, CIO of Private Wealth at Glenmede
“The path of short-term rates is tied to inflation, with a swing factor around that due to how strong or weak the economy is looking… A 5% funds rate is necessary if inflation is running at 6% and 7%, not so when inflation is back down to 3%”
Lindsay Rosner, multisector PM at PGIM Fixed Income
“The inflation story is not over yet, and there is some market complacency that they have the right Fed playbook”
On Not Being Mom and Dad’s Recession – BofA’s Savita Subramanian
“When we think about our parents and prior generations, recessions looked really different… the good news is that today, corporates and consumers actually look pretty well-capitalized — at least for the time being. And maybe that’s just a function of really low interest rates. “
On European Assets Now All the Rage as US Markets Sputter
Grace Peters, JPMorgan Private Bank
“We went through 2022 and this huge regime shift, from a world of ultra-low rates to a world where there is a cost of capital, and valuation matters”
Charlotte Ryland, co-head of investments at CCLA Investment
“Simply looking from an index perspective, markets outside the US would appear to offer considerably better value”