The standoff between treasuries and risk were highlighted – and severely – in the last few sessions. The potential tapering off of QE would suggest that the economy is on a sounder track and does not need the adrenalin syringe of QE but the data to confirm that the economy is past the hump is skinny and spotty at best. Besides, if that were indeed true (that the economy is past the crutches of QE), then growth stocks would tear away from the safe sectors like utilities and REITS and we have not seen conclusive evidence of a long-term rotation there.
Of course, it is sensible to play to an eventual end of QE and the rise of rates and we have been saying that investment grade is the most sensitive to such an adjustment given the skinny spreads (see below) that do not quite compensate for the duration effect of rate moves. In the last month, an entire year’s income has been wiped off by the magnitude of rate moves. High yield looks a little better in this respect, with more spread vs. treasuries. But then investment grade continues to have forced buyers from the insurance world and ratings-handcuffed pensions and banks. Bereft of such handcuffs, one might find safety and return in higher quality “B” high yield credits than the investment-grade world.
Have a good week ahead!
Investment grade +80 bps over swaps (5 wider week over week)
High yield – $106.125 price, 5.45% yield to worst.
Emerging market +111 bps over swaps