By Joy Wiltermuth
There is no cheap debt in sight.
The Federal Reserve’s pledge to bring inflation down to its annual target of 2% means investors should brace themselves for the central bank’s interest rate to peak at around 5% in June, but will remain so for some time Torsten Slok, chief economist at Apollo Global Management, should stay close to an “equilibrium rate” of 2.5%.
Slok has dubbed the malaise that has dogged financial markets since last year an “asset price recession,” not an economic one. On Friday, he expanded the argument, saying that while Fed funds rates are likely to peak in the coming months (see chart), investors shouldn’t expect a return to near-zero Fed rates, which have historically been around for a long time prevailed 15 years.
He said on a Friday that an equilibrium interest rate of 2.5% “keeping the economy at full employment and inflation at 2%” has implications for investors if it resets higher, including “a myriad of implications for investors.” American Corporates and the Financial Markets”. customer note.
Fed fund futures traders on Friday were expecting a slim 0.9% chance of a September rate cut from the current 4.25% to 4.5% range, with the probability of an easing to 22.1% by December would rise, according to the latest CME FedWatch tool
Higher borrowing costs can eat away at corporate earnings and affect credit spreads or the amount of compensation bond investors demand above a risk-free benchmark to act as lenders for counties, municipalities, corporations and even the US mortgage market.
Spreads on US investment-grade corporate bonds have widened to around 1.3% from a pandemic low of under 0.9% this week as the Fed hiked rates, according to the ICE BofA US Corporate Index. But full borrowing costs also include the 10-year Treasury rate, which was up nearly 3.4% on Friday, according to Dow Jones Market Data, from a one-year low of about 1.7% in March.
Slok also highlighted the prices of technology and growth stocks, which have been impacted by higher interest rates. According to FactSet, the tech-heavy Nasdaq Composite Index is down about 22% over the past 12 months.
U.S. stocks traded higher on Friday, but the S&P 500 index is still down nearly 12% over the trailing 12 months, while the information technology sector is down about 17.5% over the same period and the communications services component is down 30%, according to FactSet % declined .
– Joy Wiltermuth
(ENDS) Dow Jones Newswires
1/21/23 0822ET
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