{"id":39010,"date":"2024-12-19T18:35:18","date_gmt":"2024-12-19T18:35:18","guid":{"rendered":"https:\/\/isafespend.com\/?p=39010"},"modified":"2024-12-19T18:35:19","modified_gmt":"2024-12-19T18:35:19","slug":"more-hawkish-fed-is-bad-for-credit-spreads-by-investing-com","status":"publish","type":"post","link":"https:\/\/isafespend.com\/?p=39010","title":{"rendered":"More hawkish Fed is bad for credit spreads By Investing.com"},"content":{"rendered":"
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Investing.com —\u00a0Bank of America analysts warned in a note this week that the Federal Reserve’s December Federal Open Market Committee (FOMC) meeting signals trouble for credit spreads.\u00a0<\/p>\n

The Fed’s more hawkish stance, highlighted by a 25-basis-point rate cut and a shift in the SEP, raised concerns about inflation and broader market stability.<\/p>\n

\u201cThe big change was in the SEP [Summary of Economic Projections],\u201d BofA noted.\u00a0<\/p>\n

They explained that the Fed now anticipates higher core PCE inflation for 2024 at 2.5%, with risks \u201cskewed to the upside,\u201d potentially due to tariff impacts.\u00a0<\/p>\n

Chair Jerome Powell underscored these inflation uncertainties during the press conference, further dampening market sentiment.<\/p>\n

According to BofA, this hawkish outlook is \u201cbad for spreads for two reasons.\u201d First, heightened uncertainties negatively affect credit spreads, which serve as a measure of risk.\u00a0<\/p>\n

BofA explains that following the December FOMC, equity markets reacted sharply, with the dropping 3% and the plunging 4% in a single day.<\/p>\n

Second, the Fed\u2019s stance is detrimental to investment-grade (IG) technicals.\u00a0<\/p>\n

\u201cThe strongest IG investor demand in 2024 was during 1Q and 3Q as the outlook for the Fed was turning more dovish,\u201d analysts explained.\u00a0<\/p>\n

With the Fed\u2019s outlook shifting hawkish, BofA believes investors may shy away from IG bonds despite higher yields.\u00a0<\/p>\n

\u201cElevated rate risks should be negative for IG demand despite higher yields,\u201d BofA stated.<\/p>\n

The market reaction was swift, with the Treasury yield curve bear flattening, notes the bank.\u00a0<\/p>\n

They add that the 2-year yield surged 11 basis points, and the 30-year rose by 9 basis points. Markets are now pricing in fewer Fed cuts by the end of 2025.<\/p>\n

\u201cMarket pricing now implies 1.3 cuts in 2025, compared to two cuts forecasted by our economists,\u201d said the bank.<\/p>\n<\/div>\n