High yield market still not pricing in recession risk

Alan Greenspan made the headlines at the beginning of this year when he said that the risk of a US recession was 1 in 3, and has since said that recession risk had risen. Larry Summers (former US Treasury Secretary and Chief Economist at the World Bank) put the risk at 50/50 in September. The truly horrendous data coming from the US housing market makes us think that the risk of recession is pr…

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The global default rate can only go one way from here

Data from Moody’s shows that the global high yield default rate fell to just 1.27% in September, the lowest rate since March 1995. The global default rate has now been below 2% for 25 consecutive months, the longest stretch since 1978 (when the high yield market didn’t really exist).

The steady decline in the default rate has been a bit of a surprise – indeed, Moody’s model has been predicting …

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Building pessimism in the US

Confidence among US home builders has hit an all time low in October, breaking the previous record set in January 1991. All components of the survey were weak – present sales fell to an all time low (breaking the January 1991 record), future sales were unchanged (staying at an all time low), and prospective buyer traffic slipped below the previous record set in December 1990. The data suggests …
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International investors sell a record amount of US assets

The US Treasury Department announced yesterday that August saw a record net outflow of $69.3bn from US assets (equities, notes and bonds). This is particularly alarming considering that expectations had been for a $60bn inflow. The outflow was a combination of international investors selling US assets, and US investors buying international assets.

Perhaps most interesting of all was that Chine…

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Structured credit markets still look unattractive

Credit markets have enjoyed a fairly strong rally over the last few weeks, with spreads back to levels seen at the beginning of September. Some of the biggest gains have been in the areas that previously saw the largest losses, although asset backed securities (ABS) and mortgage backed securities (MBS) have still been among the biggest losers since the financial crisis began in June. One type o…
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US economy could be in a worse state than data suggests

See this link for an excellent summary of the impact of recent financial developments on the US economic outlook from Janet Yelen, President of the Federal Reserve Bank of San Francisco.

She concludes:

“In determining the appropriate course for monetary policy, we must recognize that most of the data available now reflect conditions before the disruptions began and, therefore, tell us less ab…

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Letter from Toyko

I was in Tokyo with Richard Woolnough-san last week. We think the perma-bears on the Japanese economy are wrong, and that some of the official economic statistics are masking an underlying recovery. There are some significant structural changes happening in the economy: for example, participation in the labour force by younger women is increasing dramatically, and immigration is increasing (alb…
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High &#39real&#39 interest rates will slow the UK economy

When the Bank of England meets every month, market commentators always focus on the nominal interest rate. But what many people fail to realise is that it’s not the nominal interest rate that matters, it’s the real interest rate (ie nominal interest rates minus the inflation rate). If nominal interest rates rise from 5% to 6%, but inflation jumps from 2% to 4%, then real interest rates have act…

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Head Scratching Stuff

The dichotomy in asset markets has many, myself included, scratching their heads. Whilst the last four months have seen falls in the European and US high yield bond markets of approximately 1.3% and 2.9% respectively, equity markets have continued their upward trend. In fact, over the same time period the DAX has returned circa 0.8%, the S&P 0.9%, the DOW 3% and the MSCI Emerging Markets Index …

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Is the UK housing market on the brink?

The housing market is the transmission mechanism between Bank of England base rates and the UK consumer. The B of E cuts interest rates to encourage borrowing, which causes house prices to rise and homeowners’ pockets to swell. Higher interest rates slow the economy by restricting borrowing and suppressing the housing market. The state of the UK housing market is therefore one of the most impor…

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