We have all heard the adage “Cash is King” but it would appear that in addition to being royalty it can also confer said regalness as the amount of money ($3.592TN given an estimate by the WSJ) being pumped into the world’s economies is beginning to have an effect. It is not completely determinable if it is the desired effect as the rate at which money is being added to the global financial system seems to be higher than the rate at which it can be put to work.
The result is an influx of cash into the financial markets. Called by some a “bailout bubble”, Joachim Fels, co-head of global economics at Morgan Stanley explains, “All that money that was printed had to go somewhere, it has been pushing up commodity prices and stock prices, starting in emerging markets and then pushing over into developed markets.” “It is quite easily the biggest combined fiscal stimulus the world has ever seen in modern times,” per Goldman Sachs’ chief economist Jim O’Neill.
On a daily basis much is made of the stock market’s move off the devil’s level on March 6th but corporate bonds have not been piker’s by any stretch in the current move. Barclays Capital maintains a U.S. Credit Index and that measure has moved recently from a high of 347bps May 21st to 285bps as of Fridays close.
The move in the 10-year U.S. Treasury last week to 4% had comments flying regarding inflation among other things but Jason Quinn who co-heads high grade and high yield flow trading at Barclays is not a buyer of that theory. He believes instead that “there is so much slack in the economy, it’s very difficult to argue that it’s inflation. With unemployment at 9.4% there is no wage growth, which is the source for core inflation.”
Two other Barclayite’s, Eric Bertrand and Roger Freeman, have also been talking about credit spreads recently and in their last weekly credit call they noted that credit indexes are right where they were last September. They also discussed the move in the front end of the curve last week with fed-funds futures pricing in tightening in 1Q10.
The pair disagrees with this prognostication saying “that while market conditions have improved, the Federal Reserve is still expected to remain at 0%-0.25% through 2010."
They also pointed to money flows into the corporate market, both high grade and yield, being at historically high levels and continuing to run at a very strong pace.
The CDS indexes would appear confirm what Barclays’ bond boys are saying with the High Yield index breaking the 900 barrier on Friday to close at 896 (ceteris paribus that has been know to be a good thing for stocks.) and the High Grade index is nudging closer and closer to the 120bps mark closing just 2bps above it on Friday. These levels in the High Grade index are the lowest seen since this time last year when it closed at 117bps on June 19, 2008. The last time the High Yield index had an “8″ handle was October 3rd of last year when it closed at 845bps.
Needless to say we are not out of the woods yet but there are worse things than a steady decline in credit spreads.
Enjoy the week.
