| Welcome to the Weekly Fix, the newsletter that's never in a blackout period. I'm cross-asset reporter Katie Greifeld. The Federal Reserve's blackout period is upon us with less than two weeks until December's policy meeting. Luckily for market participants and financial journalists, we heard from Jerome Powell himself on Wednesday to wrap up another dizzying period of Fedspeak. These were the two headlines that caught my eye:
*POWELL SAYS FED WILL NEED RESTRICTIVE POLICY FOR `SOME TIME'
*POWELL: TIME FOR MODERATING HIKE PACE MAY COME AS SOON AS DEC.
Added together, that seems to be a recipe for 'higher but slower' — the terminal rate's ceiling is lifted, but the Fed will take its time getting there. Interestingly, investors heard the second part but brushed off the first. Pricing for the Fed's destination rate slipped below 4.9%, according to swap markets, a move accelerated by raft of softer-than-expected US data on Thursday. That dragged two-year Treasury yields to 4.23% on Thursday, the lowest level in two months, while benchmark 10-year yields dropped to 3.5%. The tech-heavy Nasdaq 100 — an index stacked with the type of duration-sensitive growth stocks that would welcome such a shift — squeaked out a gain on Thursday after roaring 4.6% higher in the wake of Powell's talk. To Morgan Stanley's Michael Wilson, that action in equities amounts to little more than another bear market bounce. While that enthusiasm may last further into December (don't make me say Santa Claus rally), the firm's chief US equity strategist said the average investor should probably just buy bonds. "If you think about bear markets that are punctuated by either an economic or earnings recession, we think we will get at least one of those, the earnings recession," Wilson told Bloomberg Surveillance on Thursday. "The order of operations is very clear. You want to be cash first, then you want to buy Treasuries — long duration — then buy credit and buy equities last." In the Treasury market, pretty much every yield curve that people pay attention to is inverted right now. This week, the so-called global yield curve joined that list: the average yield on sovereign debt maturing in 10 years or more fell below that of securities due in one-to-three years for the first time this millennium, Bloomberg data show. If you subscribe to the yield curve's recession-forecasting prowess, the global government bond market is bracing for a big one. And at least in the US, the direction of travel seems to be deeper into inversion, given the Fed's resolve to hike-and-then-hold while the economic backdrop frays. At first glance, the Treasury market is sending a very different messages from that of corporate bonds. Credit spreads — which have been remarkably resilient all year — are far from recession-pricing levels. Investment grade spreads are hovering near 140 basis points, while junk clocks in near 450 basis points — a far cry from the "high 800s, low-900s" levels seen in your garden-variety downturn. But BlackRock's Gargi Chaudhuri doesn't see a great divergence in what Treasuries are saying versus corporate credit in terms of recession probabilities. The "foretold" recession that the US economy is careening towards is one of the Fed's design, she said, a nasty but necessary medicine to short-circuit inflation. Unlike past contractions, corporate America is set to enter any coming downturn with unusually healthy balance sheets and historically low default rates. With that setup, it's reasonable to think that credit spreads can remain relatively calm, she said. "This is not a balance sheet recession. This isn't a recession that's coming up because of excesses in leverage," Chaudhuri, head of iShares investment strategy for the Americas, said in a Bloomberg Television interview. "We're going to slow down, we're going to have a higher unemployment rate, but this isn't one that's going to have credit spreads blow out to levels seen in previous deeper recessions. Even still, spreads have been little more than a mirror image of equities all year. Case in point: high-grade spreads reached their ceiling for the year at roughly 165 basis points on Oct. 12, while the S&P 500 touched 2022's low just a day later. That was a repeat of similar episodes in late June into July, March and early January. The lockstep movement between spreads and stocks pours a bit of cold water on the long-held idea that bonds are supposed to lead stocks. Credit spreads are often regarded as a read on corporate America's health and access to capital — a foil of sorts to the emotionalism of the equity market. "Which is the smart money, is it equities, is it corporate fixed-income, is it Treasuries, what is it? The upshot is it's there's no clear answer," DataTrek Research's Nicholas Colas said. "I went through the math of the individual turns in the market between spreads and the S&P. Sometimes they lead by a day or two, sometimes they lag by a week or two, all I can say for sure is they've been very coincident in general in turns all this year." Given that dynamic, it's probably a folly to try and glean a specific macro signal from either asset class, Colas said. Case in point: tightening spreads, a stubbornly low VIX and rallying stocks could easily be seen as an endorsement of next year's corporate profit picture. Instead, it's more likely a sign that "overall investor confidence in corporate earnings may be out of step with economic and fundamental realities," he said. Charting IG spreads versus the S&P 500 paints a pretty clear picture, but let's put some more numbers on just how tightly linked the two markets are at the moment. The 21-day correlation between the iShares iBoxx $ Investment Grade Corporate Bond ETF (ticker LQD) and the S&P 500 is about 0.82 — just a hair away from an all-time high reached in June 2021. If stocks and bonds are doing the same thing, and yields are super high right now, why bother with equities at all? Bloomberg's Liz McCormick and Anchalee Worrachate had a great piece on duration last month, which included this mind-boggling stat: Consider the two-year Treasury note. Its yield would need to rise a whopping 233 basis points from before holders would actually incur a total-return loss over the coming year, primarily thanks to the cushion provided by beefy interest payments, according to analysis conducted by Bloomberg Intelligence strategist Ira Jersey.
I shudder to imagine what act of God would cause another 2.3% jump in yields right now. And given that two-year Treasuries — the closest thing to a risk-free asset you'll find — have recently yielded about 4.5%, many would consider that a pretty good risk-reward profile. BlackRock's Chaudhuri expects that line of thinking to fuel a surge in demand for fixed-income products over the coming year as investors size up the relative value of stocks versus bonds. "The demand will continue to come back, especially if fears of a slowdown continue to persist and even if they don't, as investors look at their portfolio and realize that to hit a 6.5% or 7% in yield, their fixed-income will do so much of the hard work for them, that they don't actually need as much of the equity exposure," she said. Commodity Hedge Funds Are Back After a Decade in the Wilderness
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