When Will The Music Stop?

The investment environment is in transition, with uncertainty around policy moves contributing an increasing amount of uncertainty for asset prices.

March 06, 2013   |    By Scott Minerd

Global CIO Commentary by Scott Minerd

We are not at risk of seeing an immediate correction in asset prices, but we are moving into a transition period that will be characterized by greater uncertainty around policy moves. As credit spreads continue to tighten, the market will eventually anticipate a move by the Federal Reserve to normalize interest rates. Intuitively, rising interest rates should lead to widening credit spreads, but historically that has not been the case. Instead, the past several times that the Fed has ended accommodation it has been interpreted as positive for markets. This was because the Fed would only cease accommodative policies when its members believed that economic growth would continue to accelerate. Given the historical precedents, investors should recognize that a normalization of monetary policy is unlikely to immediately cause spreads to widen.

Credit Spreads Typically Tighten After Fed Ends Accommodative Policy

A normalization of monetary accommodation does not necessarily lead to an imminent widening in credit spreads. Since 1986, the Federal Reserve started to unwind its easing policies five times, during four of which, U.S. high yield spreads continued to ratchet in. On average, credit spreads kept tightening for nine months following the first increase in the Federal Funds Target Rate, as the strengthening economy tended to remain supportive of risk assets.

U.S. HIGH YIELD BOND SPREAD PERFORMANCE WHEN THE FED STARTED RAISING RATES

Source: Credit Suisse, Bloomberg, Guggenheim Investments. Data as of 2/28/2013. *Note: The range is generated by calculating the max/min value for all five previous cycles.

Economic Data Releases

U.S. GDP Revised to Positive Territory, Most Other Indicators Encouraging

Confidence in Eurozone up, as Italian Election Effect Yet to Hit, China’s Expansion Slows Slightly

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.



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