Lead-Lag Live: Credit Markets & Financials
The Federal Reserve’s moves in 2022 led to the sharpest increase in interest rates in over 40 years. That speed may have surprised many investors. It also led to a big reset in valuations in both stocks and bonds. Those assets had their worst combined year since the 1930s.
The biggest hit in the bond market came from long-duration bonds. Shorter-duration notes weren’t as impacted. However, the big shift higher in interest rates led to massive losses for longer-dated issues.
This could be viewed as a duration crisis. Investors who hold long-term bonds to maturity will be fine over time. But those who overpaid when interest rates are low are suffering.
We could see that trend further play out this year with a credit crisis. Due to the rapid changes in interest rates and asset valuations, lending conditions are tightening. If things get too tight, we could be in for a credit crisis.
The last such crisis was part of the 2008 meltdown. Companies were unable to get short-term financing. And lending for housing evaporated as prices in that market came down heavily.
This could be a worst-case scenario for markets this year. While it’s a remote possibility, there are some cracks in the system. That could indicate further trouble in the months ahead, so investors should stay cautious right now.