A measure of perceived risk in corporate credit markets increased Wednesday after the Federal Reserve paused its string of interest-rate hikes, but indicated more monetary tightening may still come to help tame inflation.
(Bloomberg) — A measure of perceived risk in corporate credit markets increased Wednesday after the Federal Reserve paused its string of interest-rate hikes, but indicated more monetary tightening may still come to help tame inflation.
The spread on the Markit CDX North American Investment Grade Index, which rises as credit risk increases, widened as much as 2.12 basis points as of 2:08 p.m. in New York, and was 1.16 basis points wider at 3:18 p.m. Its high-yield counterpart, which declines as credit risk increases, fell by 0.27 cents to 102.20 cents.
The Fed left the benchmark federal funds rate within the range 5% to 5.25% Wednesday, but its forecasts show borrowing costs rising to 5.6% by the end of 2023, compared with the previous projections of 5.1%. A dozen of the 18 Fed members saw rates above the median range of 5.5% to 5.75% — that surprise took the market off guard, said Bloomberg Intelligence Chief US Interest Rate Strategist Ira Jersey. Swaps traders pared back their bets for rate cuts by the end of the year after the decision.
The decision to pause rate hikes for today’s meeting is part of the process of tempering the magnitude of rate hikes over time as the tightening cycle gets closer to the end, Fed Chair Jerome Powell said at a press conference. Powell said he expects next month’s meeting will be “live.”
“Speed was very important last year,” Powell said. “It’s common sense to go a little slower. The committee thought overall it was appropriate to moderate the pace, if only slightly.”
Here’s what some market participants are saying:
William Zox, portfolio manager at Brandywine Global Investment Management
- “The Fed is sending mixed messages. A hawkish pause. But you shouldn’t confuse a long lag with a soft landing. And you shouldn’t confuse a countertrend rally with a new bull market before a recession even starts. I am skeptical that the Fed is even trying for a soft landing”
Scott Kimball, managing director at Loop Capital Asset Management
- “The statement so far reads as though this was a de facto tightening of conditions. This was an opportunity for the Fed to get back in the drivers’ seat vs. the market and they punted on it. They’re signaling two more hikes, probably a strong message to the market that they’re not looking to cut. But, why not just raise rates once? Then they wouldn’t have to move the dot plot as much and the market probably would have reacted to that better”
Nicholas Elfner, co-head of research at Breckinridge Capital Advisors
- “And it’s a Fed pause at the June meeting, the bond market’s base case. Consumer and producer inflation rates have moderated providing the Fed with cover for an early summer break. The Fed’s hawkish pause is neutral for corporate credit. While the corporate sector is not over-leveraged, the rapid tightening that began in Spring 2022 has inverted the yield curve, strained the banking sector, and resulted in declining profits”
Gautam Khanna, head of US multi sector fixed income, Insight Investment Management
- “The pause is largely expected, the median dot moving up to 5.625[%] was higher than expectations, particularly considering the progress we have seen in headline inflation and the fact that monetary policy is a blunt instrument with long and variable lags. We are not surprised we got an additional hike in their forecasts but were not expecting two. No guarantee they deliver on these but will help keep conditions on the tighter side instead of the classic last-hike rally scenario”
Brian Kennedy, portfolio manager at Loomis Sayles & Co.
- “It’s a month-by-month thing now and we’ll have to wait and see what the data looks like. The two hikes being put into the rate forecast is interesting. It would tell me that inflation isn’t coming down fast enough and they may have to do more in the future”
Bob Kricheff, portfolio manager and global strategist at hedge fund Shenkman Capital
- “This year the Fed’s movements have been in a much more narrow band than in 2022. In credit this appears to be increasing the impact of individual credit selection over macro factors.” Macro is now less of a factor, he said
–With assistance from Josyana Joshua, Richard Annerquaye Abbey and Sana Pashankar.
(Updates with CDX move, adds quotes in comment section.)
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