“I wish there was a painless way. There isn’t.
Federal Reserve Chairman Jay Powell told reporters as much when the central bank raised US rates this week, and the markets are listening.
The resulting dollar strength contributed to the crushing of the pound, as well as all these other things. And then at least six further central bank rate hikes (plus Japanese currency intervention that likely involved selling dollars to buy yen), the pain is spreading even to large-cap US equity indices, down more than 2% to the nearest pixel.
Or, as Bank of America puts it: “It’s going to hurt.”
“Central banks will climb until something breaks. . . Low liquidity increases the risks of overshoot and tighter financial conditions,” the bank’s rate strategy team wrote in a Friday note. .
Of course, whenever rates rise and markets sell off, there’s a chance it’s driven by duration rather than a general panic of risk aversion. . .
Just kidding, not this time! US junk bond ETFs (HYG and JNK) are down more than 1%, while the high-quality corporate ETF (LQD) is down around 0.7%.
Tony Pasquariello of Goldman Sachs intervenes:
[Two-year yields] are looking for the biggest annual backup since the infamous bond market massacre of 1994 (an event that very few of today’s risk takers have witnessed… By construction, everything playing out now in real time – dramatically higher policy rates, the pullback from the Fed’s balance sheet contraction, and tighter capital constraints on U.S. banks – point squarely in the wrong direction for liquidity. see in the first chart below, it’s safe to say that this inflection has only just begun, while liquidity is just one entry into the fundamental equation, this is clearly a headwind for assets risky – and again created a feeling of “abandoning ship” within the stock market.
In fact, investors have withdrawn money from all asset classes except money market funds over the past week, according to another BofA team.
But hey, at least 10-year gilts are now more profitable than Treasuries! (Currency adjustment not included.)