Chart Notes
- Yields are monthly averages except for current month
- Current month reflects yields on May 17, 2022
Yield Categories
- AAA: Top Tier
- BBB: Lowest Investment Grade
- BB: Highly Speculative Junk Bonds
- CCC: Vulnerable to Nonpayment
Complacency Abounds
- CCC-rated debt currently yields 12.93% vs the 2008 peak of 39.24%. In 2016, a non-recession year, CCC-rated debt yielded 20.82%.
- BBB-rated debt currently yields 4.78% vs the 2008 peak of 9.79%. In 2018, a non-recession year, BBB-rated debt yielded 4.73%.
- BB-rated debt currently yields 6.07% vs the 2008 peak of 15.75%. In 2016 a non-recession year, BBB-rated debt yielded 6.58%.
Yields are rising but largely reflect the mythical soft landing thesis.
Fed Has Room to Hike
As long as the credit markets remain complacent the Fed has ample room to hike.
And the Fed will continue to hike until there is a recession, a credit event, or inflation comes down.
Which One?
I suggest the Fed will pause on recession, at least for a few months, and may pause before that if inflation starts to bend. My last call was a pause after a July hike, and I am sticking with that opinion.
Other bright minds I follow believe the Fed will keep hiking until inflation is way lower unless there is a credit event.
It’s possible both views are correct. A recession, credit event, and a drop in inflation can all hit simultaneously.
How Fast Will the Hikes Come?
We are all guessing, but for now assume the Fed gets in a half-point hike in June, and another half-point hike in July.
That would put the Fed Funds Rate at 1.75-2.00%.
I am not positive we get that high. A quarter-point hike or even no hike in July is a reasonable shot if retail sales and housing get crushed and inflation moderates somewhat.
The Neutral Rate
Neutral is the Fed rate that neither promotes growth nor attacks inflation.
Many on Twitter keep expressing the idea that the neutral interest rates is close to the CPI.
I assure you neutral is nowhere close to 8% or even 4%.
Where is Neutral?
For discussion of the neutral rate, please see The Fed Searches For the Neutral Interest Rate, Where the Heck Is It?
It would not surprise me in the least is neutral was 1.50%. And if so, the Fed is highly likely to overshoot.
If the Fed hikes to 3.0%, I am sure the Fed will have overshot neutral, but I also doubt we get there regardless of inflation.
I would expect some sort of credit event before rate gets that high.
What Next?
That picture is more clear.
In the short- to mid-term, expect more hikes and much more stock market carnage.
The stock market is nowhere close to value territory as Target, Walmart, Amazon and other company earnings misses have shown.
Target Plunges 25%, What About Yesterday’s Big Retail Sales Blowout?
For discussion of earnings misses, please see Target Plunges 25%, What About Yesterday’s Big Retail Sales Blowout?
Also see my timely April 30 post S&P 500 Earnings Estimates for 2023 Rise, It Won’t Happen
The technical stock market damage is huge and the fundamentals are very poor. I will post some more charts later today or tomorrow.
This post originated at MishTalk.Com.
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creditspreadalert.com
A wave of buyer’s remorse is taking shape in several heated real estate markets, after housing prices started dropping and the number of sales slowed over the last two months.
Realtors and lawyers in Toronto and Vancouver say they have noticed buyers looking at what options they have to get out of a purchase and sellers hoping to ensure one goes through because conditions have shifted dramatically from the previous highs and frenzied pace.
The country experienced a 25.7 per cent drop in the number of homes sold over the last year and a 3.8 per cent slide in housing prices between March and April, the Canadian Real Estate Association said Monday. The average home price last month totalled $741,517.
Such numbers have prompted some sellers to explore lawsuits to ensure transactions move forward and other purchasers to worry about the value of pre-sale properties they bought years ago but have yet to take possession of.
“With today’s real estate prices, there’s really no option but to go all in and if you’re going all in, and then suddenly you’re realizing that perhaps you made a bad bet and there’s a way out of that bet, you’re going to do whatever you can to get out,” said Mark Morris, a Toronto real estate lawyer.
In recent weeks, he has seen nine cases where buyers want to back out of deals but on Monday alone was approached by three sellers keen to use legal channels to keep purchasers from walking away.
Morris doesn’t call the encounters a trend because it’s unclear how many other lawyers are seeing the same spate, but three queries in a day is his new record. He used to see one case of that nature every few months.
“Purchasers are looking at the existing crisis, and in the best of times, they feel they overpaid, but now they have objective proof that they’ve done so because markets have started to pummel and fall and really shows no signs of slowing down,” said Morris.
“Many of those buyers are faced with the option of moving forward or upping and walking.”
People get “spooked” every time the market turns and explore what they can do about deals they signed, but few end up walking away because it’s hard to get out of such transactions, said Phil Sopher, CEO of Royal LePage.
He thinks the exception to this pattern came in 2020, when the COVID-19 pandemic broke out and people wanting out of transactions had so many unknowns on their side.
Most buyers trying to end a deal this year won’t be successful because there is no legal way out, but such cases are also impractical for sellers, Morris said.
Gold? What a joke. The dollar is killing gold. Gold is the old man’s crypto.
days. I love this volatility. Making a fortune with it in my trading
positions.
continue their 2 year long plunge. Still waiting for that “demand
destruction” to stop the fall in inventories. Wonder when that will
happen? Maybe at even higher oil prices?””””””