From the desk of Willie Delwiche.
Key Takeaways:
- Corporate bond yield momentum a headwind for stocks
- Growth and inflation leave little excess liquidity for financial markets
- Fed poised to follow global central banks into tightening mode
Plenty of eyes are on the Fed this week. The decisions it makes this year with respect to tapering its asset purchases, beginning a rate hiking cycle, and the timing of its balance sheet wind down will reverberate through the financial markets. This week’s meeting is more about posture and communication than it is about action - even with that I would not be surprised by hawkish dissents from members of the committee who want to accelerate the time table for any or all of the decisions mentioned above. Before getting to possible equity market implications of interest rate hikes, we would do well to acknowledge that liquidity conditions have already begun to deteriorate.
The long-term trend in the 10-year T-Note yield turned higher a year ago and the yield recently got to its highest level since pre-COVID. We’ve seen similar developments around the world. The 10-year German Bund yield has been testing resistance at 0% as it tries to get back into positive territory for the first time since mid-2019. Corporate bond yields have stopped going down but aren't making much of an ascent. After peaking in March of last year, corporate yields re-tested their lows. It has only been in the last month, as talk of rate hikes by the Fed increased in intensity, that corporate yields started to rise again.
