Salient to Investors:

Jan Loeys at JPMorgan Chase said:

  • The worst first half of the year on record for corporate bonds may only deepen, as a whole set of new regulations means potential buyers do not have the same capacity to absorb credit risk.
  • In the past the extra spread on corporates absorbed interest-rate rises, but this is not the case now because credit gained the most from the search for yield fueled by central banks’ stimulus. Now the music is stopping and investors are trying to reduce and they can’t.
  • Weak secondary markets means there is probably pent-up selling pressure making it too early to take a bullish view on credit.

Hans Mikkelsen et al at Bank of America is tactically underweight high-grade bonds on concern about the rotation out of them, as flows follow returns. Mikkelsen says the problem is not higher interest rates in themselves – which are normally good for credit spreads – but the rate of increase in rates.

John Stumpf at Wells Fargo sees the biggest challenge to bankers as managing the risk of losses resulting from rising interest rates.

Lloyd C. Blankfein at Goldman Sachs says the interest-rate environment has parallels to 1994, when a sudden and sharp increase in rates caught many investors off-guard.

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