The Selloff In Rates Takes Down US Corporate Bonds, Most Notably In Longer-Duration IG

Good start for the USD IG primary market, with several issuers on deck today, including a $2bn, 3-tranche offering from Caterpillar; the first week of the year is expected to see about $40bn in total new volume

US$ High Yield Bonds Were The Best Performing Fixed Income Asset Class In 2021 | Source: Credit Suisse


US Equity Indices Kick Off The New Year With A Decent Uptick On Average Volumes

Under the hood, it was a mixed day with only about half of S&P 500 stocks rising, led by the energy and consumer discretionary sectors; growth and small caps overperformed the wider market

Top- and Bottom- Performing Countries In 2021 (1-Year US$ Total Returns) | Sources: ϕpost, FactSet data


Treasury Yields Rise From The Belly Out With Higher Inflation Breakevens And Higher Real Yields

The most meaningful impact of the December FOMC has been to move forward the Fed Funds rate liftoff: Fed Funds futures now price in 100% probability of a rate hike by the end of May 2022, with a 68% chance the committee pulls the trigger at the March meeting

Fed Hikes Priced Into Fed Funds Futures | Sources: ϕpost, Refinitiv data


High Yield Spreads Tighten As Risk-On Sentiment Returns Once FOMC Out Of The Way

Very little happening this week in the primary bond market, with only a handful of US$ deals pricing, including Skillz' $300m high yield senior note (10.25% coupon, priced below par)

1-Month Total Returns For ICE BofA US Cash Indices | Sources: ϕpost, FactSet data


US Equities Get The Year-End Rally Going With Risk-Free Event Calendar Post FOMC

Huge outperformance of growth over value, as the technology and healthcare sectors led the way; energy was the only S&P 1500 sector posting a decline today

S&P 1500 Price Ranges Show Most Sectors Are At Or Close To Their All-Time Highs | Sources: ϕpost, Refinitiv data


Euro Rises, Japanese Yen Falls After FOMC Sets Path For Feds Funds Rate Liftoff Next Year

One-month ATM implied volatilities are falling rapidly, and risk reversals in EUR, JPY are showing a moderate skew towards a weakening of the USD, as the consensus and rates differentials favor a stronger dollar

EUR CNH JPY 1-Month ATM Implied Volatilities | Sources: ϕpost, Refinitiv data


Very Slight Steepening Of The US Yield Curve After The Fed Confirms New Hawkish Bias

It's a wrap: the last major US macro event of 2021 is behind us, with some surprises (for us) in the Fed's reaction function, as the FOMC is now single-mindedly focused on inflation

Fed Hikes Priced Into 3M USD OIS Forward Rates | Sources: ϕpost, Refinitiv data


Higher Rates, Wider Spreads Take Corporate Bonds Lower Ahead Of Crucial FOMC

US equities have done better than high yield credit this year on a risk-adjusted basis, with the recent rise in front-end rates hurting HY much more than stocks

S&P 500 Index vs IBOXX USD Liquid HY Index | Source: Refinitiv


Big Drop In Technology Stocks And Another Day Of Outperformance For Value Over Growth

Decent volumes, slightly higher implied volatilities (though nothing scary), potentially opening to the door to a rally into the end of the year if the Fed proves less hawkish than the market tomorrow (which we expect)

S&P 500 Value Index vs S&P 500 Growth Index | Source: Refinitiv


Dollar Index Up Today As Further Rise in US Short-Term Rates Widens Rates Differentials

Emerging market currencies have been weakening since the start of the week, with both the Omicron risk-off sentiment and higher US rates making EM carry less attractive

MSCI EM Currency Index (USD) | Source: Refinitiv


US Rates Rise On PPI Inflation Data: Lower Breakevens, Higher Real Yields, Flatter 5s30s TIPS Curve

Market implied Fed hikes rose to 2.8 at the end of 2022, with the probability of a third hike rising from 68% yesterday to 82% today (according to 1-month OIS forward rates)

Implied Fed Hikes Derived From Fed Funds Futures | Sources: ϕpost, Refinitiv data


Good Day For US Credit As Lower Benchmark Yields Offset Modestly Wider HY Spreads

Looking at historical HY default rates, it's hard to see them going anywhere but up: as higher Fed Funds rates tend to bring higher default rates, we're likely to see a bear flattening of the HY credit spreads curve going forward

US and European High Yield & Leveraged Loans Default Rates |  Source: Credit Suisse