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“This Will Be Like 1994”: Credit Investors Are Getting Worried About The Fed

Last week, investors began to question the extent to which exceptionally loose financial conditions and strong incoming data might have left the Fed woefully behind the curve.

Those worries were reflected in rising yields, amplified by Wednesday’s blockbuster ADP print, and allayed by Friday’s “just right,” “Goldilocks” NFP number:

10Y

We’ve argued that had NFP printed a 300-handle, we might have gotten a mini-tantrum as investors tried to price a much more aggressive FOMC.

So as we await the March statement which will be exhaustively parsed for clues about the future trajectory of policy normalization, consider how BoAML’s credit clients’ outlook has changed from January. Note the sharp increase in the percentage of respondents who expect a hiking cycle to be credit negative.

Via BofAML

With the clear shift to an increasingly hawkish Fed credit investors now expect the Fed to hike rates three times a year, up from twice which was the most common response in the prior survey (Figure 4). In a big shift this also has credit investors becoming much more concerned about the rate hiking cycle leading to wider credit spreads like in 1994. Specifically the net proportion of credit investors with that view jumped to 39% (from 23%), while the share expecting tighter spreads like in the 2004 cycle dropped to 26% from 42% (Figure 5).

Respondednts

 

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