We believe the Fed will talk tough on Wednesday, lift rates into Q1 2023 and then hold the Fed Funds Rate at an elevated level for all of 2023 and well into 2024. No pivot in sight as we wrote last week. More importantly, the Fed continues to trim its balance sheet, thereby shrinking the monetary base and tightening credit.
No imminent rescue for the levered longs (which is not a differentiated investment strategy). We have seen a few cracks in the financial markets from the plummeting Pound to over-levered U.K. pension funds to a general lack of liquidity in the Treasury market. More cracks are likely to appear in the coming weeks and months as governments and investors gorged on cheap debt since 2009 and are over-levered as a result. Here are a few sign posts:
High yield issuance during the first nine months of the year was $79 billion, down 80% year-over-year and headed for the lowest total since 2008 per Fitch Ratings: HERE