There’s a lot going on in this space at the moment, so I thought it would be good to weigh in on the topics of the TED spread, the Fed, and credit conditions/credit markets. Those with bearish inclinations have jumped and salivated at the prospects of spread widening, funding cost blowouts, and the lies of LIBOR. But in this article, I aim to take a sober assessment of where I see things based on our indicator set and add a bit of perspective with some slightly longer term charts.
If the years since the financial crisis have taught us anything it is to be skeptical of fear-mongers and perma-bears. Indeed, actual investors need to be wary of jumping at shadows when history shows us that in the long run, it’s the optimists who inherit the investing earth. But that’s not to say we shouldn’t be monitoring risks and keeping tabs on changing market conditions (+look to be constantly developing new analytical technology), and of course, falling back on a sound risk management process.
And, while I continue to run with the thesis (based on the evidence I see at the moment) that the global economic upturn remains intact and that the US economy is running at a solid pace… conditions are changing. Not to wear out my message, but the 3 key themes of: higher valuations across asset classes, a maturing business cycle, and turning global monetary policy tides mean 2018 and beyond brings with it changing and more challenging risk/return dynamics across asset classes.
Taking the particular lens on the Fed/US monetary policy, and US credit market conditions, it’s clear we are in the later innings. As monetary policy progressively tightens, the burden of proof to hold US HY credit at such extremely tight spreads also rises. And the importance of keeping close tabs on this corner of the market should not be lost because there are some early warning signs. But until we see more considerable policy tightening and a turn in economic conditions it’s still mild concern rather than a case of high conviction net-short.
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