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The Only Game in Town - High Quality Credit Spreads

FICC Podcasts October 27, 2021
FICC Podcasts October 27, 2021

 

Dan Krieter and Dan Belton discuss seemingly the only factor driving credit markets: inflation. They also debate how their inflation outlook will impact credit markets going forward.


 

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About Macro Horizons
BMO's Fixed Income, Currencies, and Commodities (FICC) Macro Strategy group led by Margaret Kerins and other special guests provide weekly and monthly updates on the FICC markets through three Macro Horizons channels; US Rates - The Week Ahead, Monthly Roundtable and High Quality Credit Spreads.

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Dan Krieter:

Hello, and welcome to Macro Horizons: High Quality Spreads for the week of October 27th. The only game in town. I'm your host, Dan Krieter, here with Dan Belton, As we discuss seemingly the only topic on investors' minds these days, inflation. We also take a deeper look at the reaction thus far in credit spreads and where we expect them to move in the medium-term.

Dan Krieter:

Each week we offer our view credit spreads, ranging from the highest quality sectors such as agencies and SSAs, to investment grade corporates. We also focus on US dollar swap spreads and all the factors that entails, including funding markets, cross-currency markets, and the transition from LIBOR to SOFR. The topics that come up most frequently in conversations with clients and listeners form the basis for each episode. So please don't hesitate to reach out to us with questions or topics you would like to hear discussed. We can be found on Bloomberg, or emailed directly at dan.krieter, K-R-I-E-T-E-R, @bmo.com. We value and greatly appreciate your input.

Speaker 2:

The views expressed here are those of the participants and not those of BMO Capital Markets, it's affiliates, or subsidiaries.

Dan Krieter:

Okay, Dan. Well, I sat down to plan the podcast this week, and looked at the path of credit spreads over the last week, and saw that they're unchanged every single day since our last podcast recording. So I guess safe to say we don't have a lot to talk about in credit today. Rather, I think there's only one thing that's on investors' minds and that is inflation. It's all anybody's talking about. And so it's clearly the topic that we have to tackle today.

Dan Krieter:

So I thought, to kick the conversation off, it would be good to set the framework for our discussion on inflation. And that is delineating the two different types of inflation. And the distinction is important for our conversation. And that is supply-side inflation versus demand-side inflation.

Dan Belton:

Yeah, Dan. So economists typically refer to these as cost-push inflation versus demand-pull inflation. And so the dynamics behind the cost-push inflation is one where we have supply-side constraints or bottlenecks, much like we have today. Whereas demand-pull inflation is generally viewed as the healthier type of inflation that can often result in a wage-price wage spiral. That's the more textbook definition, generally viewed as a healthy type of inflation, at least to a moderate degree of the 2% desired inflation that the Fed typically targets.

Dan Krieter:

And I think the distinction is extremely important here, obviously, as we try to assess the odds of inflation either being transitory or not. Given the two definitions you just laid out, a cost-push or a supply-side inflation would likely be more transitory, as supply-side bottlenecks are ultimately cleared up and those goods hit the market, and the market is then saturated with goods and prices fall. Versus a demand-pull inflation, which would obviously be the wage-price spiral that you just described. More sustainable.

Dan Krieter:

And so really to try and gauge what type of inflationary environment we're in here, I thought we'd look at really the two key components for demand-pull inflation that are prerequisites to a "inflation cycle" being unleashed here. And the two key components, you sort of hinted at them earlier, but they are wages moving higher, and generally sustainably higher, as well as inflation expectations. And this is the key one, inflation expectations. You could also look at it as the psychological impact of inflation on the consumer. Does a consumer have an expectation that prices, broad based, are going to be higher in the future, which would then incentivize them to consume now? And Dan, leaning on that economics PhD that you got, can you explain in a little bit more detail that inflation expectation piece of it. Here, we're clearly in an environment where inflation is moving higher, how is the cycle really then set in?

Dan Belton:

So to start with the textbook definition of how inflation expectations can beget future inflation, think about a process in which workers are negotiating wages. If there's an expectation for prices to move higher in the next period, workers are going to demand higher wages in that period, which then can increase the price level further leading to a self-reinforcing cycle where wages move higher causing prices to move higher causing wages to move higher again, and so on and so forth. Now, like I said, that's the textbook definition that's recently come under some fire. There is a widely circulated Fed paper authored by Jeremy Rudd, which really challenged that notion that inflation expectations even matter to any degree. So we'll stay away from going too deep down that path in this podcast. But I think it's worth mentioning at least that that is the traditional reason for which economists pay attention to inflation expectations, but it's not such an iron clad metric at this point.

Dan Krieter:

Yeah. And maybe that was what I was trying to get at here because, from the description you provided, you could argue that employees go to their employers, get higher wages, which then incentivizes more consumption, and the cycle is unleashed. That's not what we've seen so far. Prices have moved up due to supply-side or cost-push factors. And now maybe we are seeing the labor market start to begin to ask for those wage increases. So maybe it's not the beginning of the demand-pull inflation cycle from a textbook perspective. I don't ultimately think that matters where it "starts." If the cycle is unleashed, we'll obviously get inflation. So I guess we'll come back to that later.

Dan Krieter:

What I wanted to do was start by looking at those two key components of a inflationary cycle that you need to have in place, both rising wages and the inflation expectations/consumption pattern changes that will really unleash a full inflation cycle, and look at them kind of independently. So why don't we start with the wage piece of it because obviously we have a labor shortage right now. It's widely reported. And it's really evident anywhere you go. Anytime you go to a restaurant, you see the help wanted signs. We're seeing businesses with shorter hours, not as good service, just not able to have enough staff.

Dan Krieter:

And obviously, Dan, we know that the drivers of the labor shortage are the pandemic. We did not have a labor shortage like this prior to the pandemic, and we do now. And it also obviously goes without saying maybe that we don't know the exact drivers of labor shortage. Nobody does. But we can talk about some of the key factors that are driving the labor shortage to try and figure out if it's going to stay here more permanently. And I guess we can start down with the impact of extraordinary unemployment benefits, which many had pegged as a key driver of labor shortage that would likely be quickly resolved once those unemployment benefits expired. We've now seen those unemployment benefits expire, and we have not yet seen a significant increase in the participation rate.

Dan Belton:

Yeah. So the labor participation rate ticked actually a 10th of a percent down in September when many were expecting it to increase. And so a lot of the quits that we've seen, quits are, of course, a voluntary measure of workers leaving their jobs, the quits rate in August was an all time high. There were 4.3 million quits, which actually equates to, just in one month, about 3% of workers leaving their jobs. So really a staggering number when you really think about what that actually implies. The sectors that quits were most pronounced in were healthcare, childcare, retail, and then hospitality. So really what we have there is both lower wage sectors, but also frontline workers. So it's a little bit difficult to pinpoint exactly what's driving it. I think it's probably some combination of virus concerns as well as pent up savings, largely as a byproduct of fiscal support, increased asset prices. And then just a lack of spending during most of the pandemic.

Dan Krieter:

Yeah. It's clear at this point that the unemployment benefits were not even the primary driving force. I'm not yet ready to say that some of the assistance programs put in place are having no impact. Yes, the unemployment benefits have rolled off, but there are still programs providing support to people who are either not working or maybe underemployed, either from a where they're working or how much they're working standpoint. Even just for example, some of the housing support programs, forbearance programs at Fannie Mae and Freddie Mac, were still heavily utilized even as recently as Q2 financials, which are the most recent financials from the two GSEs. We have over 500,000 households that are still in active forbearance, not paying their mortgages. And if we assume an average of two potential labor force participants per household, that's over a million potential workers who have not paid their mortgage in as much as 18 months.

Dan Krieter:

And there's also rent assistant programs. I think here it's worth noting that in September, right after the national eviction moratorium, for the most part, expired, we saw a 10% increase in a CARES Act program meant to assist renters who were not able to make their payments. A 10% increase 18 months into the pandemic, which just goes to show that there are still people not paying for housing, which can be as much as, the rule of thumb is 33% of your income should go towards housing. I think for certain low wage earners, it's probably much more than that. And people have not really had to pay their housing, or certain people have not had to pay their housing in a long time. I'm not saying that's what's driving the labor shortage. I don't think it is. But I think at the margin, there's still some lingering effects from fiscal stimulus and assistance programs that may have resulted in a slower need to go back to work for certain subsets of the economy.

Dan Krieter:

But no matter what, it's not the driving force. Likely the driving force, is you hit on them, Dan, early retirement is a large theme talked about, ad nauseam. And particularly with 401(k)s likely much higher after the asset price appreciation you talked about. Savings, for sure. We've seen people build up big savings over the pandemic that they've been able to live off of for at least a couple months here while they decide what they want to do. Maybe instead of going back to their previous job, they're trying to get something better. Whether that's get their "dream job," whatever that is. Looking for the career for some maybe restaurant or bar workers who wanted something different. Maybe they're trying to find employment there. Maybe you have some entrepreneurs looking to build the next great app or whatever it is. And the savings built up over time has allowed them more flexibility.

Dan Krieter:

Certainly then the childcare dimension is a huge one. Particularly with children not vaccinated, there is a real trade off in deciding whether or not you should send your kids to school or daycare when they're not vaccinated and not able to affect effectively socially distance or wear masks or something, expose them to the virus. But also here, there's just likely a change in psychology. And that's been talked about a lot as well. An increased importance on work life balance. Maybe people working when they need to work. Driving for Uber or being a DoorDash delivery person, pick up some hours here and there, and not do the regular 9:00 to 5:00. And that's particularly true for parents who kept their kids at home when maybe that was previously thought of as impossible. They found a way to do it. And some parents are rethinking, do we really need two incomes? Or can we get by with one of the parents being a full-time caregiver to the children?

Dan Belton:

Yeah. Certainly I think there's a wide range of factors that have gone into this labor shortage. We don't know the answers. I don't think anyone really does. There's a lot of different theories out there, but it's safe to say at the end of the day, this is part structural, it's part permanent, but part of it is probably going to change as the virus gets better and people are able to return to work in a more normal fashion. So the participation rate peaked at 63.4% at the end of 2019. Most recently it's at 61.6%. So we're talking about a two percentage point decline. I think we'll see an increase over the next year or so. Probably not to where it was at the end of 2019 anytime soon, but well, above where it is now. I think that's safe to say,

Dan Krieter:

Yeah, I'm in agreement with you there, Dan. I think it will get better as really only two main factors. You get some of those assistance programs we talked about earlier ending and people maybe having to go back to work, or at least work more frequently to make ends meet. But also that savings piece to it. That savings will deplete over the course of the next few months. And if people were thinking about returning to work, maybe in September or October, and that's been pushed to the new year, as savings continue to come down, people may need to go back to the workforce. So I think the labor supply will get better. We'll see that part rate tick up.

Dan Krieter:

But there is a structural component to it. And I think it's true. We're not going to see labor force participation rate increase to pre-pandemic levels anytime soon. There is durability to this. And that first factor when we were talking about the top of the podcast, laying out the factors that drive demand-pull inflation, I think the wage increase/labor shortage piece of it is likely to stick around. And a vaccine mandate was going to maybe come at end of this year. Now looking like after the holidays. That's not going to help either as some workers choose to leave of their job instead of getting vaccinated. So labor shortage, and I think upward pressure on wages is here to stay. So that's the first half.

Dan Krieter:

Now let's turn the conversation, Dan, toward that second factor we outlined above. And that is inflation expectations and/or the change in consumption patterns that would be prerequisite to a sustainable inflation cycle. And this is where I have a few more doubts on the permanence of inflation.

Dan Belton:

So I think it's interesting. We just talked about the savings rate, and I think that's played a big role in how strong consumption has been. And that really shows that the recent inflation, while it's been largely driven by these supply-side bottlenecks, there has been really strong demand from the consume since the pandemic really started get better in the United States. Consumption's now up 12% year over year. Really an off the charts growth, considering that during the previous expansion, it was something in the realm of about 4% annual growth in consumption. We're even including the depths of the pandemic. Since the end of 2019, consumption's up at an annualized rate of about 5%. So above trend growth of consumption, even during the pandemic. So that's been a strong driver of these price pressures, of course, exacerbated by the supply-side bottlenecks we've talked about. And inflation expectations have taken a while to get here, but they've increased significantly. Depending on the metric you're looking at, anywhere from 4% to 7% inflation expectations over the next year or three years.

Dan Krieter:

And the key question for me on this topic, Dan, and we can spend a little bit more time here, is consumption is indisputably higher. Is that a result of pent up savings being deployed, or a signal of a new pattern for consumption where people think inflation is here to stay, pricings are going to be higher, and that's incentivizing them to consume now? And that may be the heart of this inflation question. Is this just the effect of savings being deployed? And I'd argue that there's a good chance that it is.

Dan Krieter:

We'll start with some of the labor factors we talked about earlier. Some of the things driving the labor shortage. Two big components of that are the likely early retirement. And we've been talking about the demographic shift for a decade now, and we are now really seeing it. And maybe some of those Baby Boomers retiring even earlier as a result of higher 401(k)s and a preference to not work. Health factors, all that. We're seeing early retirement.

Dan Krieter:

And we are potentially seeing what was dual income households maybe switching to a single income model, where one parent stays at home and watches kids, or at least does so more than they would've in the past. And both of these examples to me are not indicative of consumers who are ready to consume a lot more than they had historically. Obviously retirees generally don't consume much more. They live off their savings. And a double income housing going down to single would not result in there being more consumption. So from a long term perspective, you can make an argument that there may not be this big change in consumption.

Dan Krieter:

In fact, maybe there's more evidence that it's more of a reliance on savings. I mean, let's think about what the pandemic did to all of our lives. It descended upon world out of nowhere. There was no expectation for it. Anyone doing financial planning, obviously this wasn't in the financial plan, to say the least. But over the course of the past year, people have just gotten more money than they had, whether that's because of stimulus payments, or because of asset price appreciation, or simply because they weren't able to spend it on the things they would normally spend it. People were left with a lot more money at the end of 2020 than they perhaps thought going into the year.

Dan Krieter:

And so then looking at financial outlays for 2021, people can decide how they wanted to spend those savings. They could invest them, or they could spend them. They could, for lack of a better word, make a capital purchase on some major life goal, a new house, a new car, finishing the basement. Maybe even something more discretionary, a big trip, or some luxury item that you never thought you'd have that you could suddenly afford. Or maybe living off your savings for a few months, and taking some time away from work or figuring out your career, whatever you wanted to do. You could live off that savings. And if that's the case, then this one time bump where you have a big depletion of savings, combined with supply-side bottlenecks, of course you're going to see inflation. So the question becomes, is this just a deployment of savings, or is it the sign of something more to come?

Dan Belton:

Yeah, Dan. So I think the data really does bear out that the savings rate and consumption have had a very close negative correlation since the onset of the pandemic. And now the savings rate is starting to normalize to levels closer to the end of 2019. At the end of 2019, the savings rate as a percentage of disposable income was just over 7%. It peaked around 34%, and it's steadily come back down of course, jumping with stimulus payments earlier this year. But it's now just around 9.5%. So near the lowest it's been since the onset of the pandemic and continuing to decline. It'll be interesting to see what happens as that savings rate continues to fall assuming that it does and what that means for consumption. I think it's possible that the savings rate continues to fall below that 7% or so level that we had at the end of 2019. That's likely only going to happen if consumer confidence gets stronger. If it doesn't get stronger, there'll be much more precautionary savings as there typically is. And we could see a decline in consumption happen relatively quickly.

Dan Krieter:

You know, you hit on consumer confidence. I think it's a key point. Because if we're looking at a more sustainable or durable change in psychology, or consumption patterns, I would personally expect to see an increase in use of credit. And this goes back to the textbook example of a demand-pull inflation cycle. Which is we expect higher prices in the future and also higher wages, right? If the worker is going to the employer and asking for higher wages, you're expecting to be making more and you're expecting prices to be higher. In which case you should be incentivized to purchase now and pay later. Not necessarily much later, but you could put a large purchase on a credit card, and theoretically pay it back later. Obviously there's some interplay there between inflation rates and short term interest rates, which are going to earn on that money during that loan period.

Dan Krieter:

But the key component there is also wages. It's not just what you earn on interest while you haven't paid back the item. It's also that you expect to be making more. And from a textbook perspective, in an inflationary cycle, we should see heavier use of credit field consumption. And the jury's kind of out there. Looking at consumer credit metrics, they've come up for sure. They're not at all time highs, but they're increasing. Loan demand, as the big banks reported it during the last earning season, it's disappointing. It's softer than others maybe would hope for. But there is some evidence of loan demand. And so we're getting kind of neutral signals from consumer credit. So rather than drawing a sweeping conclusion from that, I'd just say that, going forward, I'll be watching consumer credit metrics a lot more closely maybe than I've watched them in the past. Because if this is going to be a true inflationary cycle, I would expect to see use of credit going higher.

Dan Belton:

Yeah. It's going to be an important point to watch. And just reading through some of these bank earnings reports, there is an expectation among some of these executives that loan growth is going to start to pick up in the next few quarters. So we'll see if that comes to pass. And I think that could likely be a driver of further inflation.

Dan Krieter:

Yeah, it was obviously a theme following the financial crisis, a lack of loan demand, and it's going to be a key determinant of how sustainable inflation is here, is how much people lean on credit going forward. So I guess to bring the conversation to sort of a conclusion at this point, I think it's safe to say, Dan, and I'll be interested here if you agree with me, that all the ingredients for sustained inflation are there. We see a labor shortage that's likely to prove durable. We see supply-side bottlenecks that are going to continue to influence prices higher in the near term, likely at least for a period of months, if not a year. And that's going to work towards changing people's inflation expectations and possibly their consumption patterns. All the ingredients are there. Obviously we're not telling the listener anything they don't know already. This is all anybody's talked about for a couple weeks.

Dan Krieter:

So the question is, are we going to actually get that follow through to inflation, or will it eventually prove transitory? And for me, I'll just say that I'm still in the transitory camp. I still think that this is, more than anything else, a depletion of savings built up over a pandemic that people didn't expect to have. And you're seeing after a once in a lifetime event, people looking at their lives and considering structural changes that they likely weren't considering in 2019. Figuring things out, working from home for a while, being unemployed, chasing that dream job, whatever it is. And as things continue to normalize, we're going to see things go back to something more resembling normal. And some of the longer term drivers key here being demographics. And that's to say nothing for automation and things of that nature, which are going to only accelerate, given the labor shortage. Those long term drivers of disinflation that reigned for the entire post-financial crisis period will return and ultimately weigh on inflation bringing it down.

Dan Krieter:

Now I've been in that camp for a while now. I actually always thought we were going to have another inflation rethink. I thought it going to happen earlier. I thought it was going to happen more towards the September timeframe, and rates would go higher, and people would become scared about inflation. And again, obviously that was not right. And had I been trading Treasuries at the time, I would've lost a boatload of money. But another scare from the inflation side of things was something I always expected. And now we are getting that. But my view doesn't change that. I still think in the end, it will ultimately prove transitory. Interested in your thoughts.

Dan Belton:

Yeah. So to me, it's going to come down to how long we're going to see this elevated inflation. Because I think at this point it's a foregone conclusion that inflation, I don't know what exactly the word transitory means at this point, so I'll stay away from using that word. But inflation is here to stay at least in the medium term. I think it's a foregone conclusion that we're going to have elevated inflation into early 2022, maybe even later into 2022.

Dan Belton:

Personally, I think we're going to have higher inflation readings. And by higher, I mean with a three or four handle, as opposed to a one or two handle for much of 2022 and into 2023. I'm not ready to say yet that we've had a regime shift from these disinflationary factors that you just talked about, and that inflation is here to stay permanently. So I guess from that standpoint, it is going to be a temporary phenomenon, but it's not going away in the next couple months or quarters. I think it's going to be here for a couple years. And then these supply chain issues are eventually going to fix themselves. Some of this increased consumption that we've seen is likely to dissipate, and labor supply is going to come back at some point to some degree. I just think the economy is going to take some time to recalibrate to whatever this new normal is. And once it does, these disinflationary factors are likely to re-emerge.

Dan Krieter:

Yeah, you made a key point there that I want to stress. I too think inflation's going to be here for the short term. And that's made particularly true by the attitude of central banks towards inflation. Obviously, as we're seeing a lot more hawkishness from central banks here more recently, but I think if you're a central bank and you're looking at the prospect of higher inflation for a short time period versus acting too aggressively and choking off a recovery, particularly with still some weakness, for sure, from the pandemic, at least until inflation gets truly indefensible and you're risking your credibility, you're going to let inflation run a little bit here.

Dan Krieter:

So I think the central banks, they had to pivot their positioning. They've done so. But I don't think we're going to see drastic action yet from the central banks. We're going to see inflation continue to be the top story, and likely through at least the first quarter of 2022, likely longer than that. And it's at that point that, as supply chains start to be resolved, and we've seen that six to 12 month time period laid out by some really important people, the executives on all the earning calls in Q3, from the big banks, to some of the manufacturers, all not expressing a significant amount of concern over supply chains.

Dan Krieter:

A similar timeline for six to 12 months of those being cleared up as that happens, as you get to the midpoint of 2022, and those goods start to hit the market. And maybe the changes in consumption are more a one time phenomenon as a result of depleting pent up savings rather than a change in consumer psychology. And those things combined to bring inflation down. I did say the word transitory earlier. I sort of regret that. Sorry, force of habit. But I think that inflationary fears will start to wane toward the middle part of next year as those longer term disinflationary factors we got so used to about prior to the pandemic sort of return to the forefront.

Dan Krieter:

So now I guess we could move on to the more important piece for us specifically is what does all this mean for credit? And let's talk first about where credit spreads are just right now. Because we've all seen in the past couple weeks, the extremely rapid repricing of central bank expect expectations for rate hikes get pulled forward meaningfully, a large backup in short end Treasury yields and a curve flattening. And through that whole process, credit spreads have not only not widened, if anything, they're modestly narrower over that timeframe.

Dan Krieter:

And that strikes me as surprising. Because you think inflation for credit spreads should be a significant headwind. Not just because of the impact of inflation on the bottom line, which we've all talked about here, but also the stance of the central bank potentially allowing rates to drift higher, making refinancing more difficult. Which brings into the conversation the zombie corporation problem that we talked about so much last year that maybe aren't viable in a higher rate and environment. And what that could mean for a more prolonged default downgrade cycle if the Fed doesn't so readily step in and short circuit. It seems to be inflation should be a big negative for spreads. We haven't seen it.

Dan Belton:

Yeah. Dan, I think you could make a very compelling case right now that spreads are tighter than they should be relative to where fundamentals dictate. The primary thing that I'm attributing that to is the excess liquidity in the financial system. And like we've talked about many times on this podcast before, that has just elevated all asset prices, including corporate credit. So when we look at our model for credit spreads, our model calls spreads 21 basis points rich to where fundamentals would dictate they trade. So at about 89 basis points in the ICE BAML index right now. Our model says spreads should be closer to about 110 basis points. And that's a pretty big miss for the typical fit of the model. It's actually about 1.6 standard deviations tight of where the model implies spreads are. So over the past three months, the model implied spreads have widened about 20 basis points while credit spreads at the index level haven't really moved at all.

Dan Belton:

So a couple of the factors that have really been driving this under performance in model implied spreads, which we haven't seen mirrored in actual spreads are, first and foremost, financial conditions. Financial conditions, while they're still about neutral or moderately accommodative, they've been much more supportive over the past year. And that's deteriorated somewhat as inflation has become more of a concern in the past couple of months. Alongside this interest rate volatility, which has caused financial conditions to tighten somewhat. We've seen some data misses and the Citi Surprise index is one of the variables in our model. We've seen some negative data misses which have caused the model implied spreads to widen out. Issuance has been stronger than expected in October. That's been a slight driver of model implied widening.

Dan Belton:

And then earnings revisions due to the Delta variants. Even though earnings have come in quite strong over the past couple months, earning were revised weaker generally ahead of these releases. And typically we would equate that with some amount of widening in credit spreads, which we haven't seen. And similarly, ratings upgrades, while they're still very strong, they've moderated somewhat in the past few months, as we would expect. Rating actions over the summer were about at all time highs in terms of how constructive they were. Never been more constructive. They've just moderated somewhat. So still not a headwind for credit, but some reason for spreads to be at more normal ranges than where they are actually trading right now.

Dan Krieter:

I think the model piece is really interesting, Dan, because I agree that liquidity is still playing an outsized role in the determination of credit spreads. And it fits well with the medium term review that we've laid out in the episodes prior to this one, which I recommend going back to listen to if you haven't heard them. But we just talked about how we expect spreads to migrate wider to a new trading range at the beginning of 2022, reflecting these inflationary fears.

Dan Krieter:

I don't think the credit spreads can continue to remain agnostic to the inflationary moves that the rest of the market is reacting so strongly to. Credit will come under pressure, I think at some point, and we're going to see a widening. So that's why we've been recommending for investors to maybe take some profits, sell them to the strength of these recent risk on days that have been supported by earnings, and look to re-initiate carry trade sometime in 2022 at a wider trading level.

Dan Krieter:

And that doesn't mean necessarily that there's not interesting things to do. We don't love credit spreads where they are right now. But given the strong back in short end yield, structure is a potentially very interesting way of adding yield to the portfolio. If you ultimately think the inflation may not be as strong as the market's currently anticipating, as I expect, and central banks won't deliver on as aggressive hiking campaigns as the market's currently pricing, you can still add significant yield with callables or mortgage backed securities, things with optionality, to take advantage of the short end repricing that may ultimately prove to be too optimistic. Anything else, Dan?

Dan Belton:

No, I think that'll do for this week. Thanks for listening.

Dan Belton:

Thanks for listening to Macro Horizons. Please visit us at bmocm.com/macrohorizons. As we aspire to keep our strategy efforts as interactive as possible, we'd love to hear what you thought of today's episode. Please email us at Daniel.Belton, B-E-L-T-O-N, @bmo.com. You can listen to this show and subscribe on Apple Podcasts or your favorite podcast provider. This show is supported by our team here at BMO, including the FICC macro strategy group in BMO's marketing team. This show has been edited and produced by Puddle Creative.

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It does not take into account to the particular investment objectives, financial conditions, or needs of individual clients. Nothing in this podcast constitutes investment, legal, accounting, or tax advice, or representation that any investment or strategy is suitable or appropriate to your unique circumstances, or otherwise constitutes an opinion or a recommendation to you. BMO is not providing advice regarding the value or advisability of trading in commodity interests, including futures, contracts, and commodity options or any other activity which would cause BMO or any of its affiliates to be considered a commodity trading advisor under the US Commodity Exchange Act. BMO is not undertaking to act as a swap advisor to you or in your best interest in you. To the extent applicable, you'll rely solely on advice from your qualified independent representative in making hedging or trading decisions.

Speaker 2:

This podcast is not be relied upon in substitution for the exercise of independent judgment. You should conduct your own independent analysis of the matters referred to herein together with your qualified independent representative, if applicable. BMO assumes no responsibility for verification of the information in this podcast. No representation or warranty is made as to the accuracy or completeness of such information. And BMO accepts no liability whatsoever for any loss arising from any use of or reliance on this podcast. BMO assumes no obligation to correct or update this podcast.

Speaker 2:

This podcast does not contain all information that may be required to evaluate any transaction or matter. And information may be available to BMO and/or its affiliates that is not reflected herein. BMO and its affiliates may have positions, long or short, and affect transactions or make markets in securities mentioned herein, or provide advice or loans to, or participate in the underwriting or restructuring of the obligations of issuers and companies mentioned herein. Moreover, BMO's trading desks may have acted on the basis of the information in this podcast. For further information, please go to bmocm.com/macrohorizons/legal.

 

Dan Krieter, CFA Director, Fixed Income Strategy
Dan Belton Vice President, Fixed Income Strategy, PHD

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