U.S. domestic equity markets turned sharply negative in early February as interest rates headed higher amid concerns of returning inflation—and in a single day, the U.S. Treasury market became a safe haven for panicked investors. But is panic warranted?
U.S. Treasury rates have risen 35 basis points since the end of 2017. This is not alarming; it is simply a re-pricing (which I consider any move, up or down, of 35 to 50 basis points).
There is no significant drama in the credit markets.
There is no significant drama in the credit markets. Investment-grade yields are up 25 basis points, but the credit markets are still open. The investment-grade new issue calendar is scheduled to be about $25 billion or more this week.
Companies are announcing earnings, then issuing notes and bonds. Both repatriation and/or lower taxes might be good for debt markets. Many global companies (including Apple and Microsoft) have issued recently because funds were locked overseas, and companies like Verizon are seeking to reduce leverage because of the tax reform, and over time that should result in a lower risk spread for debt capital.
Meanwhile, high yield bond yields are up approximately 25 basis points since year end, so there is no fire or smoke there either.
In terms of the U.S. Federal Reserve (Fed), I believe the Treasury market is catching up to policy. With consensus estimates for global gross domestic product (GDP) rising, a rise in interest rates isn’t problematic.
Indeed, I believe the market might need to move from three increases to four during the first half of 2018, and I don’t see that as deleterious. However, if we seriously start considering a fifth move, that might challenge equity multiples—but we are not at that point yet.
Looking ahead, I am watching GDP and inflation.
Looking ahead, I am watching GDP and inflation. I believe inflation is well contained (as noted in another post from Olga Bitel) with structural constraints such as globalization and technology.