The recent Bond-a-Palooza has been a classic growth scare. As equity values plummeted, T spreads to Junk have moved out. Investors are shunning credit risk, opting for duration risk and relying on the Fed to neutralize interest rate risk. So what about the Fed?
There is a vocal contingent of pundits calling for the Fed to either increase the size of its balance sheet, reinvest maturing notes in longer term notes, or both. The Fed has moved up the credit structure over time. The market has moved long term yields down since the FOMC anchored the front end. Why would the Fed add duration risk to its portfolio? Efficacy would need the Fed to go out the credit stack in QE not the term structure. We still see quantitative easing procedures as the most misunderstood policy tool. Analysts continue to confuse a few comments on stocks as the Fed "targeting" asset prices.
We advise watching the T/HY spread into and out of the Jackson Hole con fab. The context of any compression should be interesting. Bottom line, there are 3 risks to owning a note. They don't go away at zero, even permanent zero.

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