The flight to safety has helped bonds, but spreads remain narrow
Review of the financial situation
The Fed noted that over the intermeeting period, the S&P 500 (SPY) increased and bonds rallied, presumably on the back of the decision not to taper at the September meeting. It said the market pushed out its estimate for the first taper. It gets this information from primary dealers through its Desk Survey. Primary dealers trade Treasuries in the primary market, which means they trade directly with the Fed. This is a lucrative business.
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The Fed addressed the stress in emerging markets, noting that the confidence that seemed to come from the initial decision to taper was “reversed late in the period when investors appeared to pull back from riskier assets in reaction to rising concern about developments in some emerging market economies and their possible implications for global economic growth.”
The Fed noted that credit in the corporate sector remained strong:
- “Corporate bond spreads continued to narrow over the intermeeting period, with investment-grade bond spreads reaching their lowest levels in several years and those on speculative-grade corporate bonds approaching pre-crisis levels. Bond issuance by domestic corporations generally stayed strong, commercial and industrial loans on banks’ books increased by a notable amount late in the fourth quarter, and issuance of leveraged loans and collateralized loan obligations generally continued apace.”
On the household front, the Fed noted that home price appreciation continues—although it did say it believed credit standards remain tight. It doesn’t believe the appreciation we’ve seen since real estate bottomed will be sustainable. Refinance activity had more or less dried up, as mortgage rates increased by 100 basis points since bottoming in May.
So, to sum up, the credit markets are functioning well, aside from the few hiccups we saw related to the government shutdown. Both corporations and households are finding themselves able to access the credit markets. Increased availability of credit is extremely important to commercial REITs like Simon Property Group (SPG), Boston Properties (BXP), Kilroy (KRC), Vornado (VNO), and S.L. Green (SLG).