Ben Laidler, global markets strategist at the eToro trading and investment platform.
The expert highlights the rebound experienced by the yield of US public debt, which “stokes concern that “something will break” in the markets, in a situation similar to that of September 2022 with the liability-based investment scare. (LDI) in the United Kingdom, or March 2023 with the debacle of small American banks.”
“The caution comes from the fact that the world has become increasingly accustomed to this "new normal" of great uncertainty and that the "options" of central banks' rate cuts are once again insurance for investors in the face of the cooling of the economy. underlying inflation,” he indicates.
Rising US bond yields fuel concerns that "something will break."
BREAK: The yield on US government debt, the foundation of modern finance, has seen an unprecedented rally (see chart).
This fuels concerns that "something will break" in the markets, in a situation similar to that of September 2022 with the liability-based investment (LDI) scare in the United Kingdom, or March 2023 with the debacle of small American banks. The usual suspects are the upcoming maturities of commercial real estate debt and high-yield corporate debt, and pressure on smaller banks.
These are stressful but well-known situations, so any surprises are more likely to come from off-screen, such as private credit markets in the US or peripheral sovereigns in Europe.
The caution comes from the fact that the world has become increasingly accustomed to this "new normal" of great uncertainty and that the central banks' rate cut "options" are once again insurance for investors in the face of cooling inflation. underlying.
MATURITY WALL: Concerns center on well-known risks such as commercial real estate (CRE) and high-yield corporate debt (HY).
They face a large and perennial "maturity wall" as they need to refinance at higher rates in a weakening economy.
According to S&P, this "maturity wall" of commercial real estate debt amounts to $500 billion this year and next, while that of high-yield corporate debt is $100 billion this year and double that next year.
However, real estate markets are already primed for this, with listed office REITS down 31% this year, and alternative capital providers, such as private equity/investment funds and big banks, running on "gunpowder." dry."
High-yield corporate bond spreads have been very well contained, and fundamentals have remained relatively strong.
BANKS: US banks continue to suffer from a perfect storm of deposit outflows, a net interest margin affected by rising "deposit beta", slowdown risks raising provisions for bad loans, and now more losses in the bond portfolio.
These unrealized losses on bonds amounted to $560 billion before the latest spike in yields, according to the FDIC.
However, the Federal Reserve supports the sector, with a Term Bank Financing Program that reaches a record $109 billion. And investors know the risks, as U.S. regional and conventional bank ETFs have fallen 28% this year and are nearing May lows.
Source: Territorioblockchain.com
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