No risk in corporate debt *UNLESS THERE’S A DOWNTURN
May 21, 2019
–Yields backed up modestly yesterday with tens +2 bps to 2.412% and reds through golds -2.0 to -2.5. The administrations is apparently softening some restrictions on Huawei, leading to a small bounce in risk assets.
–Not much new in Clarida’s comments yesterday. He repeated that the neutral rate is low and said that inflation has been less responsive to resource slack. Last night, Powell gave a balanced speech about the risks of corporate debt. Though attuned to the risks, he doesn’t believe they pose a threat as compared to the subprime crisis. However, he did acknowledge that a downturn in the economy would bring significant stress to some companies. From the speech: ” Business debt relative to the size of the economy is at historic highs. Corporate debt relative to the book value of assets is at the upper end of its range over the past few decades. And investment-grade corporate debt has shifted closer to the edge of speculative grade.” He concludes that the present situation doesn’t present notable risks to financial stability. Clearly, the Fed is monitoring the situation. While Powell says that the US financial system is better able to withstand stress, I have attached a chart of Deutsche and the Italy Bank index. Financial spillovers are hard to quantify.
–Also I have attached a chart from the St Louis Fed which shows a pretty significant drop in Commercial and Industrial loans this year after strong growth in 2018. A temporary pullback or a sustained fade of last year’s stimulus?
–Yesterday’s largest trades were replacement of wings as June options expire Friday. For example, TYQ 133c bought for 2 in size of 100k. TYQ 132 thru 134.5 calls all settled 2.
–Powell speech link:
https://www.federalreserve.gov/newsevents/speech/powell20190520a.htm
