![]() ![]() ![]() If the Fed doesn’t soon end its rate hiking cycle, Sega says it may risk triggering a recession that isn’t short and shallow, which could drag down suburban real estate along with office buildings in city centers. stocks were lower Thursday on revived concerns about regional banks, including PacWest Bancorpĭ isclosing a 9.5% decline in deposits in recent weeks. Sega said higher rates still pose risks for commercial real estate, particularly if banks can’t finance their exposure, but he also views the sector as having “time to cure” some of its woes, with long-term leases in place and staggered debt maturities over the next few years. government and interest rate shocks in the past year left banks and other asset managers sitting on unrealized losses on low-coupon pandemic bonds, which have become worth less as newer debt issued at higher yields has cut their value. The Fed responded to that credit freeze by rolling out a series of emergency facilities to shore up confidence in markets, including a program for the central bank to buy corporate debt for the first time in history.Įasing of credit conditions then led to a historic borrowing binge by corporations, households and the U.S. In the early part of the COVID crisis in 2020, investment-grade corporate bond credit spreads blew out to 4%. Credit spreads, however, have been roughly steady in the past year at around 1.5% above the risk-free Treasury rate for U.S. corporate bond market have increased as the Federal Reserve has dramatically raised its policy interest rate to a 5%-5.25% range from nearly zero about a year ago. “We believe it will get resolved, but how it gets resolved likely makes a big difference to credit spreads, and to the credit rating of the U.S.,” Sega said. Foreign accounts were the biggest group at $3.7 trillion. corporate bond market with a roughly $3.2 trillion exposure, according to CreditSights. Insurance companies were the second-largest holders of debt in the $14.9 trillion U.S. Like Conning, an insurance asset manager with $191 billion in assets under management, insurance companies have a large exposure to high-quality corporate bonds, in addition to real estate and other risk assets. ![]() Riskier corporate bonds also could take a beating, pressuring credit spreads wider, while sweeping up higher-quality assets in the process, Sega said. borrowing limit risks sparking a selloff in financial markets and hurting people’s 401(k) holdings and more. Treasury Secretary Janet Yellen recently said her department’s best X-date estimate, or when the government could be unable to continue to satisfy all its obligations, is early June, and potentially as soon as June 1.Īs MarketWatch’s Andrew Keshner wrote this week, a failure to increase the current $31.3 trillion U.S. debt-ceiling deadline, which could put credit spreads in jeopardy the closer negotiations get to an “X-date” without a resolution. A bigger concern, however, is the clock ticking down on the U.S. ![]()
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