As of last Friday's close, the futures market had been pricing in 30% odds of another Fed rate hike in November (were 22% before the payroll report) and 48% by December (odds were 36% before the data were released). One reason the Fed may not go at it in either meeting came out of the San Francisco Fed’s own mouth which said: “If financial conditions, which have tightened considerably in the past 90 days, remain tight, the need for us to take further action is diminished,” and added that the surge in bond yields these past few weeks have been equivalent to a one-quarter Fed rate hike.
The Treasury market began to stand up and pay attention to the Fed’s latest hawkish rhetoric that took a leg up at the September 20th FOMC meeting. Then it was the stock market’s turn. And now the corporate bond market is starting to react. Keep an eye on the proverbial canary in the coalmine, the CCC-rated space — the average yield has soared +130 basis points since mid-September, to 14.7%, and spreads have ballooned around +100 basis points to 970 basis points. The entire high yield market has seen spreads, in the past six weeks, move up from +55 basis points to +423 basis points. When you read Big Bankruptcies Boost Economic Fears on page A2 of the WSJ, you know that long-only investors in the corporate credit space are going to be in for a whole lot of pain going forward (as per ADP, large firms shed -83k of its staff load in September for a reason). Even with the late-week stock market rebound, wide swaths are in a whole lot of pain, especially the bank index which is still down -22% from the nearby 2023 peaks and the regionals have collapsed -48%.
Keep reading with a 7-day free trial
Subscribe to Memo From the Chief Economist to keep reading this post and get 7 days of free access to the full post archives.