While the market’s main focus continues to be on yesterday’s Federal Open Market Committee comments and another move higher in US interest rates, the spike in short-term lending rates in China has also been causing concern, according to Fran Rodilosso, fixed income portfolio manager at Market Vectors ETFs.
“Central bankers around the world all will eventually have to revisit the extraordinary measures taken over the last few years to support their economies,” says Rodilosso (pictured). “Fixed income investors are right to be concerned about the impact of higher rates on their portfolios. However, for the long running health of the economy and of borrowers, all investors should be hoping that the Fed sees both a need and a path to the exit from current monetary policy. When we think about credit markets, specifically high yield, we have been hoping for a world where rates move gradually towards, for lack of a better word, normalisation. If 10-year US Treasury yields are back at 1.5 per cent at year end, I believe that would mean the US is not growing, and likely mean that corporate earnings are not growing either.”
Rodilosso noted that the People’s Bank of China, the country’s central bank, has recently been reluctant to provide additional liquidity to the banking system.
“This may only be a short-term phenomenon, and the effort to rein in rampant credit formation is a positive development, in my view. In the case of China, we are only talking about a temporary tactic right now and not a policy shift, but at least it is a sign that the People’s Bank has their eye on the ball,” Rodilosso says. “I think the really bad news would be if their effort to combat excesses, or that of the Fed to navigate the potentially inflationary consequences of its actions, comes too late.
“If China is willing to accept lower growth, rather than rapid growth at any cost, I believe the long run outcome could be a lot better. But in the short-term, clearly the latest developments from China have weighed on most commodity prices and prices of emerging market assets as well. But the biggest factor impacting the markets that I focus on most closely – credit and emerging market debt – has obviously been Treasury bond volatility.”
