RiskTrade

Implications of the Slowing Global Economy

I agree with some of your analysis - particularly the points about an impending global recession, the declining threat of inflation and the possibility of deflation. I think the dollar rally is occurring largely because, despite its obvious short comings, the dollar is still seen as the true risk free currency. However, unlike you I don't believe that corporate bond yields and preferred yields will sky rocket. In the past few days both Citigroup & AIG have issued debt based on reverse inquiry. By this I mean investors sought an issuance of debt as opposed to the company. Infact JPM priced its perps a full 25 bps less then the indicative coupon. This tells you there is strong pent up demand for high yielding good quality paper. When you give this some thought it makes perfect sense - Given interest rates are low, and inflation expectations are also low, the most natural strategy is to buy longer term high yielding paper of high quality issuers and earn the interest differential carry. This is what is happening now, and as this begins to increase yields on preferreds and corporates will actually come down significantly. Think about it and consider how much money is out of the market right now and how attractive corporate
and preferred yields look.