Tuesday, September 25, 2012

Credit markets reversing post-QE3 euphoria

In a sharp correction during the past couple of days the HY bond market erased most of the post-QE3 announcement gains. As discussed before (see post), it was clear that the HY marked was frothy going into the Fed meeting, and now asset allocators are starting to come to grips with the fact that it's gotten even richer. HY CDX and HY ETFs (HYG, JNK) sold off sharply (HY CDX is down 2% in the past 2 days).

The realization is setting in that the Fed bringing mortgage rates to new lows (national average is now at an all-time low of 3.46%) is going to do little to improve the US economy (see discussion) and corporate profits. And some of the Fed members agree with this assessment.
MarketWatch: - “We are unlikely to see much benefit to growth or employment from further asset purchases,” said Charles Plosser, the president of the Philadelphia Fed Bank, in a speech to financial market trade groups in Philadelphia.
The reversal in the credit markets is also visible in the investment grade space. IG CDX has reversed most of the QE3-driven tightening.

IG CDX spread (Bloomberg)

No matter how much MBS the Fed buys, monetary expansion is unlikely to help Caterpillar for example. And markets are starting to get the point.
NASDAQ: - Caterpillar Inc. (CAT ), the world's largest manufacturer of construction and mining equipment, recently joined the bandwagon of companies who have trimmed their revenue and earnings expectations in the wake of weaker-than-expected growth in the global economy. This news led to a 2.4% fall in Caterpillar share prices to $88.73 in after-hours trading.

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