Bank of America: “These Are The 4 Things That Can Pop The Central Bank Bubble”

Thursday, January 11, 2018
By Paul Martin

by Tyler Durden
Thu, 01/11/2018

It’s a new year… and just like last year, we greet it with not only record highs across equity markets, but a new rip tighter in spreads: as shown below, on Thursday the Barclays corporate index spread hit just +90 bps the tightest since Feb ’07.

And, as BofA’s Barnaby Martin writes in an overnight note, what should be clear already is that this credit cycle won’t simply roll over and die of old age. “Far from it, we think. In fact, we believe one underappreciated risk by the market in 2018 is that Euro credit spreads get squeezed to eye-wateringly tight levels, spurred on by a still-supportive central bank backdrop.”

Yet what makes the ongoing grind all the more confusing is that all major central banks are either in the process of hiking rates, shrinking balance sheets and QE, or at the very least signalling the limits to their monetary policy.

What’s going on?

According to Barnaby, “the current backdrop feels very reminiscent of the Greenspan era of 2004-2006. Back then US interest rates rose 17 times. Yet, financial conditions remained loose and interest rate volatility fell to very low levels precisely because Fed monetary tightening was so predictable and patient: rates generally rose by 25bp at each meeting.”

And, as discussed here previously, fast forwarding to today reveals that the same backdrop has taken hold: namely that despite hawkish overtones by central banks, financial conditions have again been loosening over the last year (Chart 1).

The Rest…HERE

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