Global Macro: The Search For Yield
| Sep 17, 2012 12:19PM ET
For weeks markets have been oscillating within the constraints of central-bank action versus lack thereof. We have finally reached the decision threshold and central banks acted in accordance with what the broader markets speculated. This in turn led to assets moving accordingly.
The Fed's decision to buy MBS and ECB's to buy sovereigns calmed fears, but it also kept interest rates suppressed. This opened up the door to the widespread "search for yield" that we are accustomed to in times of easing. Although most risks are still inherent, the prices at which one is compensated are at historic lows. In terms of yield spread, the incentive may still remain, but absolute returns are harder to find.
What was seen in the days leading up to the Fed decision was a front running in Junk Bonds (FXI ) over world equity. This indicator has been brutally suppressed lately, but with foreign central bank action, China looks to have found a bottom. Many were puzzled at the apparent inaction of The People's Bank of China on stimulating its weakening economy, but others have compensated for them. The strength comes in the form of a better global outlook, and with it, should be a considerable move in Chinese equities. Further progress needs to be made, but the vision looks to be a more stable and stronger world economy.
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