Stocks struggled largely with the psychological breach of 16,000 on the Dow, and once that was pierced, they happily eased themselves onto a new platform, spurring new debates on corrections and when. Credit was a mirror of such activity and ended the week almost unchanged. Even the 10-yr treasury has largely marked time, hovering around 2.7%. It is true that with long term expectations of 7-8% for US stocks, this year’s 25+% performance has to be diluted with corrections at some point. However, at least from the investment arena, everything looks hunky dory and the bulls are driving the bus. The correction, if it happens in the next six months, has to come from outside the investment arena; as in sabre rattling over Iran or government shutdown etc. In such a case, I would see 10-year treasury rallying closer to the 2s in yield and high yield spreads blowing out to 475-500 bps.
News that filtered out last week and that were material were largely repeat numbers. New reports showed Germany doing better and France slowing, giving deflationary forces new strength. And there were some murmurs that the Fed could cut interest rates on excess reserves, in a new way of signaling easy monetary policy. The hawks vs. doves forces were effectively settled with the Phildelphia Fed Index that came in lower than expected, squashing any taper talk for December.
Investment grade +69 bps over swaps (-1 bp tighter week over week)
High yield – 5.65% yield to worst (unchanged week over week)