Sleepwalking Toward the Abyss

Sleepwalking Toward the Abyss

This is mind-boggling. If it holds, today would be the 13th down day in a row for the S&P/LSTA US Leveraged Loan Index. Simply put, these are not the types of moves one would want to see at the beginning of a sustainable rally.

Figure: S&P/LSTA Leveraged Loan Index is getting hammered

And it’s not just in the US, we’re seeing stress throughout the global credit complex. Take Emerging Market high yield for instance.

Figure: EM High Yield spreads continue to widen

And yet, the markets continue to expect the Fed to raise rates throughout 2019 to well over 3% (subtract 100 from the futures price curve to estimate Fed rates). I can’t recall a time in my career when we have seen this much carnage in leveraged finance and such a disconnect in future Fed policy. Personally, I don’t believe such a disconnect can continue much further, but if it does, it is hard to believe how it would not be absolutely devastating for risky assets. 

Figure: Futures markets continue to project further Fed hikes past 3% despite markets stress in the here and now

With investing, sometimes, fortune favors the meek.


All Charts sourced from Bloomberg.

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