Credit update December 23, 2013

The QE taper came finally, to the tune of $10 billion, but the market paid no heed to it – enamored as it was by a far bigger headline from the Fed: that interest rates were to stay low for a longer period than previous estimates. Stocks rallied strongly on this note: that the QE taper was minimal but low rates would help the economy and drive growth rates faster. In other words, the market is saying it does not need the crutches from QE as much as it needs the low interest rates to help rev up all cylinders. And this is probably philosophically in tune with why the QE taper is happening in the first place: that the economy is past the risks of downturns and is on a growth trajectory.

In high yield fund flows, Lipper reported that inflows were close to $3 billion year to date, with ETF inflows comprising the majority. Last year, inflows were closer to $21 billion with ETFs holding a smaller share. This resonates with a desire for total-return-ers (whether retail or institutional) to relocate into equity territory for greater returns whereas “yield seekers” like insurance companies and pension funds have taken up the baton and have helped high yield stay tight. In 2014, we may see more of this behavior as conservative investors, chagrined at their non-participation in 25%-plus returning equity markets, rush to make amends and vacate their places to institutional yield seekers.

In EM news, China was down a little from needing an “emergency” infusion. Central bankers are slow on infusion triggers as they seek to clean up their internal act even as they propel the country for a stronger domestic economy, away from a purely export-oriented model. The country is still poised for growth and has targeted 7.5% which, though a lower headline, now works off a larger base (2nd largest global economy).

Spreads: Investment grade +65 bps over swaps (-4 bps tighter week over week)
High yield – 5.6% yield to worst (unchanged week over week)

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