FX Evolution: RISK-OFF Is Coming According to the Debt Markets?
While most investors may be focused on the stock market, its returns are often driven by the returns of the bond market. That’s because the bond market is based on interest rates. And today’s interest rates are near their highest level in 15 years.
As a result, high interest rates offer solid cash returns. And that competes with stocks. It also means a higher cost of capital for companies to borrow.
Big companies have a huge advantage in capital markets. They can borrow if they want to, not if they need to. Meanwhile, smaller companies don’t have that luxury.
Currently, yields in the debt market have started to tick up. That’s reflecting the latest economic data. Inflation remains sticky. So the Federal Reserve needs to keep interest rates high.
The higher and longer interest rates stay high, the longer higher debt costs will impact companies. Some smaller companies may not be able to get the financing they need to survive.
In other words, with the higher-for-longer narrative finally sinking in, markets may slow down. This could even be a risk-off event, with a market pullback in the 5-10% range.
That would take some of the froth out of the current market. And it would set up a healthy pullback. Investors could then look for opportunities for the next leg higher.