(New York)

If the Fed isn’t stimulating high yield bonds, then they might be highly risky and extraordinarily overpriced. High yield bonds spreads have narrowed significantly versus Treasuries in recent months, a very odd move given the worries about the economy (which usually hurt junk bonds). Some think the Fed may be buying such bonds, which would drive prices up and yields down. Spreads are down 110 basis points this year.

FINSUM: If everyone was so worried about the economy—which would usually push Treasury yields down and junk bond yields up—then how could spreads have narrowed between the two? Something smells wrong here.

(New York)

The economy has been in a rough patch for about a year, with major economies and emerging markets all slowing. But things may be poised to turn around. Markets have gotten very excited about the prospect for an upturn after the IMF said it expects 2020 to be better than 2019. One economist from Macquarie summarized sentiment this way, saying “As 2019 draws to a close, the market is pricing in economic recovery, with equities in the US hitting new highs and long yields well off the recent lows”. Global trade is now stabilizing, which begs the question as to whether the economy has already weathered the worst of the storm.

FINSUM: When it comes to the economy, things are very hard to forecast, but on balance the situation is looking better than worse.

(New York)

It is not going to be a huge crash, but Morgan Stanley thinks US stocks will struggle in 2020. The bank thinks the US is clearly “late-cycle” and that its growth will wane from 2.3% to 1.8% next year. It believes the Dollar will weaken and stocks will struggle. The bank thinks most of the benefits of the Fed’s rate cuts have already been priced into the market. “In 2020, the economy will grow more slowly as the bulk of the positive lift from lower interest rates will have been absorbed and households balance higher income with higher prices from tariff”, says Morgan Stanley. The bank says emerging markets are likely to outperform.

FINSUM: Of all the forecasts we have seen lately, this one seems the most realistic. We don’t see a big bust coming, but a plateau seems very believable.

(New York)

Banks across the country are under pressure, and it is starting to show. Four US banks have failed already this year (three in the last month) compared to zero last year. The reasons why are many, but low interest rates and strong competition have been impacting the space. The four bank failures do not seem to be due to a particular asset class, but particular idiosyncratic circumstances. Still, as mortgages have seen lower rates, banks are more and more likely to move into more risky areas to boost yields.

FINSUM: In 2006 there were zero bank failures, in 2007 there were three, in 2008 it was very ugly. We do not think we are going down the same rode, but it is a sign worth noting.

(Washington)

In any interesting twist, President Trump has announced that he may personally testify in his impeachment probe. Trump has indicated he is interested in the idea of being able to set the record straight himself. He says “Even though I did nothing wrong, and don’t like giving credibility to this No Due Process Hoax, I like the idea & will, in order to get Congress focused again, strongly consider it!”. Trump’s comments came at the urging of House speaker Nancy Pelosi’s request for him to testify. The president could testify via writing or in-person.

FINSUM: We doubt this will happen (Trump’s lawyers would probably be remiss in letting him testify in person), but it is an interesting turn. Imagine the media frenzy!