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Life after policy support

  • Strong crisis support from central banks has triggered substantial inflows into corporate credit, keeping spreads anchored close to multi-year lows. But will a world without QE reverse the trend?  Despite diverging monetary policy strategies in the US and Eurozone, both money markets seem to be looking at the latest developments through the same magnifying glass: The market repositioning in the short end of the sovereign curve due to pressing inflation and exacerbated supply disruptions has prompted both EUR and USD money market futures to heavily position for an earlier-than-anticipated hiking cycle in an attempt, successful or not, to suppress cyclical and non-cyclical inflation pressures. Of course, this inflation-contingent early-hiking path has not been interpreted as an indication of an early recovery but rather a depiction of temporary hiccups in the current economic recovery and a higher and stickier-than-expected inflation acceleration. Because of that, the steepness of the long end of the curve vis-a-vis ultra-short-term yields has diminished, signaling a more pessimistic stance moving forward.
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  • Along these lines, and if history is any guide, it is unusual that this pessimistic positioning in sovereign markets has not yet been transmitted to risky assets, which have not yet seen increased volatility: the difference between the move index (sovereign volatility) and the VIX (equity volatility) is at a yearly high.
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  • What’s keeping the contagion in check? As part of their generally accommodative monetary policy, central banks’ direct purchases and an implicit “whatever it takes” put protection have contributed to spreads being anchored close to multi-year lows and remarkably reduced volatility vis-a-vis equity market swings. However, there are considerable differences between central banks: On one side of the spectrum, we find Japan and the Eurozone, whose central banks own ~36% and ~18% of the eligible universe, respectively. On the other side we find the UK (~7%) and the US (~0%), with the latter having already unwound all its corporate positions. 

Contact

Jordi Basco Carrera
Allianz SE
Patrick Krizan
Allianz SE