It may not be a great time to be a Goldman Sachs shareholder. But lending to the Wall Street bank via cash deposits seems like a pretty good deal. Its high-yield Marcus saving account is offering an interest rate of 3.3 per cent.
Financial conditions have eased. Inflation metrics are beginning to look favourable. The risk of a deep recession has moderated. Credit markets are thawing as a result.
This prompts a question for institutional investors: is wading back into risky securities sensible when risk-free rates remain elevated?
Central banks recognise that the pace of price increases are flattening, yet they merely consider slowing their rate increases. The Fed may raise its benchmark rate by just 25 basis points soon instead of the previously expected 50 basis points. Still, central bankers are keen to take the current benchmark rate eventually above 5 per cent from 4.25 per cent currently.
In the first week of 2023, US companies issued more than $60bn worth of corporate bonds, far outpacing the rate in December. The ICE Bank of America corporate index for BBB bonds now yields about 5.5 per cent, down a full percentage point from October highs.
Junk bond yields have softened similarly. Analysts at BofA note that among high-yield issuers, net debt/ebitda of 3.6x is at an all-time low. And because most debt was issued years ago, cash flow to interest coverage of nearly six times is a record high.
Companies will soon report their fourth-quarter results. Economic weakening may become clearer. Research service FactSet notes that analyst estimates for 2023 S&P 500 earnings were cut nearly 5 per cent in the fourth quarter, an unusually sharp reduction.
Credit investors broadly have been excited by the volatility and increase of credit spreads through the course of 2022. It has allowed them to show off their analytical skills to find fixed-income returns. These have approached double digits in some cases.
The challenge for capital allocators now is to convince their backers that they can beat elevated risk-free rates.
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