Despite recent turmoil in financial markets, global borrowing conditions have largely withstood the shock, providing a stable environment for borrowers. While the sell-off in equities and corporate debt markets earlier this month triggered by U.S. recession fears and the unwinding of the yen carry trade caused significant losses, the broader impact on financing conditions has been limited.
Equity markets, though still down from their July peaks, have partially recovered. The S&P 500 remains 5% below its July high, with European stocks experiencing similar declines. Corporate bonds, both higher and lower-rated, have also seen a rise in risk premiums, reversing some of the decline from earlier in the year.
However, the market turbulence has not tightened financing conditions enough to cause alarm over a potential sharp economic slowdown. As Chris Jeffrey, head of macro strategy at Legal & General Investment Management, noted, "We just haven't seen big enough moves to materially change financing conditions for corporates or households."
Indeed, Goldman Sachs' gauge of U.S. financial conditions shows that while there has been some tightening since mid-July, conditions remain relatively loose compared to historical standards and more accommodative than much of last year.
The outlook for borrowers is further supported by falling yields in government bonds. U.S. 10-year Treasury yields have dropped more than 50 basis points since the start of July, and similar declines have been seen in UK and German bonds. This trend is creating favorable conditions for borrowers, with U.S. investment-grade corporate bond yields also down by 50 basis points over the same period.
Last week, U.S. companies raised $45 billion from bond sales, a sign of confidence despite the recent market volatility. Europe also saw a higher volume of bond sales compared to last year, indicating that access to credit remains robust. "It doesn't seem like access to credit is really a problem right now," said Idanna Appio, portfolio manager at First Eagle Investments and a former Fed economist.
Even in the high-yield bond market, conditions have improved. Junk bond yields are down 37 basis points since July, and U.S. companies raised $7.2 billion from bond sales last week. However, caution persists, especially with expectations of continued market volatility.
The VIX index, often referred to as Wall Street's "fear gauge," has dropped below 20 points, but it remains higher than its average from January to July. This elevated volatility creates uncertainty, particularly in equity fundraising, which typically slows down during periods of market instability. Javier Rodriguez, global head of value creation at KPMG, warned that IPO deals might slow or even halt if market conditions do not stabilize.
In credit markets, while investment-grade bonds saw inflows last week, there were outflows from junk bonds, reflecting investor caution towards weaker borrowers. High-yield bond sales globally have had a strong first half of the year, but the outflows, particularly from U.S. leveraged loans, are the largest since the COVID-19 pandemic's peak in March 2020.
The unwinding of the yen carry trade poses a further risk to global liquidity conditions. As Mathieu Savary, chief European strategist at BCA Research, explained, "Once carry trades plunge, funds flee countries and assets where they finance economic activity," potentially tightening liquidity and harming global economic growth.
While borrowing conditions remain stable for now, the road ahead is marked by uncertainty, and the potential for further market volatility cannot be ruled out.
(Source:www.beamstart.com)
Equity markets, though still down from their July peaks, have partially recovered. The S&P 500 remains 5% below its July high, with European stocks experiencing similar declines. Corporate bonds, both higher and lower-rated, have also seen a rise in risk premiums, reversing some of the decline from earlier in the year.
However, the market turbulence has not tightened financing conditions enough to cause alarm over a potential sharp economic slowdown. As Chris Jeffrey, head of macro strategy at Legal & General Investment Management, noted, "We just haven't seen big enough moves to materially change financing conditions for corporates or households."
Indeed, Goldman Sachs' gauge of U.S. financial conditions shows that while there has been some tightening since mid-July, conditions remain relatively loose compared to historical standards and more accommodative than much of last year.
The outlook for borrowers is further supported by falling yields in government bonds. U.S. 10-year Treasury yields have dropped more than 50 basis points since the start of July, and similar declines have been seen in UK and German bonds. This trend is creating favorable conditions for borrowers, with U.S. investment-grade corporate bond yields also down by 50 basis points over the same period.
Last week, U.S. companies raised $45 billion from bond sales, a sign of confidence despite the recent market volatility. Europe also saw a higher volume of bond sales compared to last year, indicating that access to credit remains robust. "It doesn't seem like access to credit is really a problem right now," said Idanna Appio, portfolio manager at First Eagle Investments and a former Fed economist.
Even in the high-yield bond market, conditions have improved. Junk bond yields are down 37 basis points since July, and U.S. companies raised $7.2 billion from bond sales last week. However, caution persists, especially with expectations of continued market volatility.
The VIX index, often referred to as Wall Street's "fear gauge," has dropped below 20 points, but it remains higher than its average from January to July. This elevated volatility creates uncertainty, particularly in equity fundraising, which typically slows down during periods of market instability. Javier Rodriguez, global head of value creation at KPMG, warned that IPO deals might slow or even halt if market conditions do not stabilize.
In credit markets, while investment-grade bonds saw inflows last week, there were outflows from junk bonds, reflecting investor caution towards weaker borrowers. High-yield bond sales globally have had a strong first half of the year, but the outflows, particularly from U.S. leveraged loans, are the largest since the COVID-19 pandemic's peak in March 2020.
The unwinding of the yen carry trade poses a further risk to global liquidity conditions. As Mathieu Savary, chief European strategist at BCA Research, explained, "Once carry trades plunge, funds flee countries and assets where they finance economic activity," potentially tightening liquidity and harming global economic growth.
While borrowing conditions remain stable for now, the road ahead is marked by uncertainty, and the potential for further market volatility cannot be ruled out.
(Source:www.beamstart.com)
