Nowadays, policy easing is a universal way to land the global economy. Yet, with a varying level of liquidity among countries, traditional sources of safety and income are outshined by the risk-reward profile of Asian credits.
A Risk Rally Or A Risky Rally?
Following the surprise from the oil price slump, the U.S. Federal Reserve decided to take the interest rates to its record low ahead of its regular meeting schedule, twice. The Fed’s promise also expanded to a new money-market support facility of an unlimited amount to prop up the market. The unprecedented move of buying non-investment grade corporate bonds and the historic scale of the rescue package have altogether flooded the market with massive liquidity.
The easing extent of this kind has artificially suppressed the interest rates and taken important market information out from the proper pricing of risk assets. Their prices no longer reflect the risk-reward considerations, but principally the Fed’s actions.
The case is strong when we compare the rising trend of new COVID-19 infected cases in the U.S. and the rallying S&P 500 Index and bond market. This reflects fundamentals detached from reality. Thus, the risk-reward in the U.S. market is not entirely attractive.
Figure 1: COVID-19 cases versus performances of the U.S. equity and bond markets