(Bloomberg) –Credit derivatives spreads edged tighter on Wednesday after the Federal Reserve cut interest rates for the first time in over four years, lowering them by a half percentage point.
Here are comments on the central bank’s move from credit market participants:
Bob Michele, Chief Investment Officer and Head of Global Fixed Income at JPMorgan Asset Management:
“Credit spreads will tell us whether investors believe the economy is in dire shape — and this was an emergency 50 basis-point cut — or whether this is just a Fed, a long way from neutral, perhaps a meeting or two away from where they should have started the cycle, so they are starting to get towards neutral. All is well,” Michele said on Bloomberg TV.
“We’re telling clients ‘just get into the bond market,’ just get into a general bond fund.
Bob MicheleYields are coming down. Yields are at this level with $6.3 trillion in cash building up and most people not liking the bond market. Some buying has brought it down here and this money will come in because they’re going to watch the return on cash go down like power windows.
Hunter Hayes, chief investment officer at Intrepid Capital Management and a co-lead portfolio manager of the Intrepid Income Fund:
“We think this rate drop is very supportive for high yield and could provide a sanguine backdrop for refinancings later this year and into 2025. People tend to fixate on yield to worst in high yield. But the yield to call on a lot of these bonds is a lot more attractive than the yield to worst implies, assuming the refinancing window becomes very active."
Hunter HayesAlthough it’s still highly uncertain what will happen, we see a scenario where a lot of companies proactively address their maturity walls in the next 18 months and high yield as an asset class then has a handsome total return profile. This scenario seems more likely against the backdrop of these more aggressive rate cuts.”
Eric Williams, head of capital structure and senior portfolio manager at Northern Trust Asset Management:
“Credit markets should react positively to the Fed’s decision to take a more proactive stance to defend the state of the US consumer. Capital markets and high yield valuations are likely to be reinforced by this decisive action going into year end.”
Winnie Cisar, global head of credit strategy, CreditSights:
"While the Fed moved by 50, this is perhaps a less dovish move than the initial move would imply as the policy rate is still forecast to be in restrictive territory through at least some of 2025. At the same time, the reassessment of growth and unemployment is a bit more cautious."
Winnie CisarWhile we have been constructive on duration amid the move lower in yields, we are now seeing more potential for pressure there while catalysts for further credit spread compression are harder to find.
Noah Wise, senior portfolio manager for the Plus Fixed Income team at Allspring Global Investments:
"The Fed delivered a dovish surprise with a hawkish twist. The 50 bp cut was more than what was priced into the market for this meeting, but they also increased their longer-term projection for the Fed Funds rate. What the Fed giveth, they also taketh away." This means easier financial conditions for those borrowing at the front end of the curve, but less so for those wanting to borrow at longer maturities. A little better for high yield and a little worse for investment grade.
Noah WiseThis means easier financial conditions for those borrowing at the front end of the curve, but less so for those wanting to borrow at longer maturities. A little better for high yield and a little worse for investment grade.
Nicholas Elfner, co-head of research at Breckinridge Capital Advisors
"The Fed decided to front-end load by dropping its target for the overnight rate by 50 basis points in one fell swoop. The debate over 25 bps or 50 bps became hotly contested. Recent progress on inflation has shifted the Committee’s focus more towards the job market where growth has been slowing."
Jimmy Whang, head of global capital markets at U.S. Bank:
“Today’s decision to start the cutting cycle supports a borrower-friendly new issue environment and will encourage some of those with 2025 needs to enter the market this year. We expect some slowdown after the early September rush, but absent an unlikely breakdown in spreads, we have a supportive backdrop for additional issuance.”
Corry Short, credit strategist at Barclays:
"This should generally be viewed as constructive for supply for the second half of the year. The outlook for growth remains constructive, which should support spreads."
Corry ShortAlongside lower yields, this should create tailwinds for deal activity. Any issuer that was debating between second half versus the first half of next year will now likely be sharpening pencils on potentially tapping the market this year.
Catch all the live updates on the rate cut announcement here.
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