ALL ABOUT THE FED TODAY
The fixed income markets have been trying to break out of the ranges that we discussed last week, with rates heading higher despite weaker economic data. What we have heard is that there is little support for govies recently, particularly the long end, which we attribute to a defensive posture ahead of the Fed meeting. This has been somewhat positive for risk assets, although the improvement in spreads and valuations can hardly been described as a resounding risk rally. Equities come to mind, which continue to hit new all time records across numerous market cap slices, trading between 1% to 3% higher since the start of earnings season. While these have been some of the more impressive gains versus global peers over the past few weeks, the S&P’s 2.5% YTD gain still lags most DM markets by a wide margin. There is little to report in investment grade land other than issuance, as the broad market remains within the 130s-ish range that it has found itself since the beginning of March. High yield continues to benefit from strong fund flows, with the recent $3.3 billion of inflows since late March the largest uninterrupted positive flows in over a year. The broad HY index continues to tighten and presently stands at 5.9%, for a 470 bps spread, effectively improving to last fall’s levels. Having said this, the energy and mining sector has driven most of the recent gains and our trading contacts find the façade of better levels somewhat misleading. The double B rating category has generally been the most stable since the start of the year, while the single B category has rallied 75 bps since the start of the year. Despite the recent improvement, the single to double B spread remains 20 wide from where it started the year, a gap we would expect to narrow if inflows continue. The move for high yield has nonetheless been fairly strong and we would expect some consolidation until we get better clarity on the timing of rate increases.