The HG bond stress - now vs 2018
A great summary via JPM on what happened in 2018 and what is happening today: "The last time HG bond spreads sold off a similar magnitude to this quarter was in 4Q18. In that quarter spreads widened 34% (from 134bp to 180bp on the JULI) and the S&P500 was down 13.6% (from 2,901 to 2,507). We are half way through 1Q22 and the selloff pattern has been similar so far. The S&P is down 6% YTD and the JULI is 15% wider, so both moves about ½ of what happened in 4Q18 in percent terms, in about ½ the time...."
How did yields react? JPM writes: "Interestingly, in 4Q18 10yr UST yields declined by 39bp over the quarter while this quarter they are up by 53bp. The Fed raised rates by 25bp in 4Q18, to 2.25%. That was the 8th quarterly rate hike in a row at that time. In contrast, the Fed Funds rate remains near zero today, but the market expects nearly seven rate increases in 2022."
Are we getting close to some sort of bottom as investors could start becoming "comfortable" sooner than later? The investment bank writes: "Catalysts for the January rally 2019 were included that the Dec ’18 rate hike was the last of that hiking cycle, and the market became comfortable that credit downgrades were not imminent. In 4Q18 there was significant discussion of BBB downgrade risk following several years of heavy M&A and a slowing economy, but this downgrade wave didn’t occur (until 2020) . A potential comparison to today is the market becoming comfortable that it understands the path of Fed hikes in ’22 (perhaps this will be delivered on or before the March 16th Fed meeting)."
How did yields react? JPM writes: "Interestingly, in 4Q18 10yr UST yields declined by 39bp over the quarter while this quarter they are up by 53bp. The Fed raised rates by 25bp in 4Q18, to 2.25%. That was the 8th quarterly rate hike in a row at that time. In contrast, the Fed Funds rate remains near zero today, but the market expects nearly seven rate increases in 2022."
Are we getting close to some sort of bottom as investors could start becoming "comfortable" sooner than later? The investment bank writes: "Catalysts for the January rally 2019 were included that the Dec ’18 rate hike was the last of that hiking cycle, and the market became comfortable that credit downgrades were not imminent. In 4Q18 there was significant discussion of BBB downgrade risk following several years of heavy M&A and a slowing economy, but this downgrade wave didn’t occur (until 2020) . A potential comparison to today is the market becoming comfortable that it understands the path of Fed hikes in ’22 (perhaps this will be delivered on or before the March 16th Fed meeting)."
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