“I wish there were a painless way. There isn’t.”
Federal Reserve Chair Jay Powell said this to reporters when the central bank raised US rates this week, and markets are listening.
The dollar’s ensuing strength has contributed to the pound getting crushed, along with all that other stuff. And after at least six additional central-bank rate increases (plus a Japanese currency intervention that likely involved selling the dollar to buy yen) the pain is even spreading to US large-cap equity indices, down more than 2 per cent at pixel.
Or, as Bank of America puts it: “This is going to hurt.”
“Central banks will hike till something breaks . . . Thin liquidity raises risks of an overshoot & tighter fin conditions,” the bank’s rates strategy team writes in a Friday note.
Of course, whenever rates are rising and markets are selling off, there’s a chance it is driven by duration instead of a broader risk-off panic . . .
Just kidding, not this time! The US junk-bond ETFs (HYG and JNK) are down more than 1 per cent, while the investment-grade corporate ETF (LQD) is off about 0.7 per cent.
Tony Pasquariello from Goldman Sachs chimes in:
[Two-year yields] are tracking for the biggest annual back-up since the infamous bond market massacre of 1994 (an event that was witnessed by very few of today’s risk takers . . . By construction, everything that’s now playing out in real time — drastically higher policy rates, the undertow of Fed balance sheet contraction and tighter constraints on US bank capital — points squarely in the wrong direction for liquidity. furthermore, as you can see in the first chart below, one can argue this inflection has just begun. while liquidity is only one input in the fundamental equation, it’s clearly a gathering headwind for risky assets — and again has created a sensation of “abandon ship” within the equity market.
In fact, investors have yanked cash from every asset class but money-market funds in the past week, according to a different BofA team.
But hey, at least 10-year gilts now yield more than Treasuries! (Currency adjustment not included.)
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