The Fed stands alone in the world with their plan to ‘gradually’ raise rates in 2016. The rest of the world’s central banks are easing monetary policy in order to spur growth. Last week, the Bank of Japan lowered its key rate below zero; they are charging a 0.10% penalty on excess reserves to banks that deposit funds there. Sweden and Denmark’s Central Banks have already lowered rates below zero. England’s Central Bank is now indicating that they will not raise rates until well into 2017. The ECB is expected to cut their rate from minus 0.3% to minus 0.4% and increase bond purchases. Countries around the world are looking to spur inflation, ward off deflation and lower the value of their currencies in order to spur exports. All of these developments (and the Fed’s raising of rates) are strengthening the US dollar, thereby lowering our inflation and hurting exports. Today’s 10 year T is at 1.87%, down 25 bps in the last 20 days. Interestingly, the 2 year T is at 0.73%, down from 1.00% in December. The 2 year T is most sensitive to the rate controlled by the Fed. The market is increasingly skeptical of the Fed’s plan to raise rates four times in 2016. A March increase is ‘off the table’ based on futures and recent statements by prominent Fed officials.
Credit Spreads: CMBS, Life Company, Bank and Debt Fund spreads are widening due to a ‘perfect storm’ of regulatory issues, alternative investment spreads widening, risk adjusted pricing, etc. More on spreads and pricing in next week’s FinFacts…stay tuned…David R. Pascale, Jr.