(Sept 19): Credit derivative spreads narrowed on Wednesday after the Federal Reserve (Fed) cut interest rates for the first time in over four years, lowering them by a half percentage point.

Here are comments on the central bank’s move from credit market participants:

Jeff Grills, head of US cross markets and EM debt, Aegon Asset Management

“High yield issuers will have a new ability to come to market that they may not have had if they were just not quite as solid an issuer as the market desired. Now with this 50 basis point easing, investors will find BB and B high-yield names to be something that they’ll look to add to their portfolios.”

Meghan Robson, head of US credit strategy, BNP Paribas

“In terms of credit spreads from here, a lot of good news is already in the price. I think this will be a supportive factor. But thinking more medium term, credit has more certainty now that the Fed put is in play, and now that the Fed is willing to react to slowing data. They’ve really prioritised actively protecting the labor market, prioritising that part of the dual mandate, which I think will be a positive for credit.”

Kyra Fecteau, fixed income portfolio manager, Wellington Management

“A 50bp cut is a confirmation of a higher downside risks in the labor market which may reduce general risk appetite. But the reality is, the labor market is still on solid footing and the Fed has a lot of flexibility to keep it that way. As the labor market continues to cool, the performance of securities exposed to consumer health may play out differently than history suggests given how much lenders have tightened up and remain tight on the credit they are willing to extend.”

Andrzej Skiba, head of BlueBay US fixed income at RBC Global Asset Management

“The idea of primary issuance slowing down in the second half of the year can finally be put to rest because we expect a fair amount of supply, taking advantage of the rallying government bond yields and opportunistic issuance to come towards our space. The lower the yields, the more issuance.”

Bob Michele, chief investment officer and head of Global Fixed Income at JPMorgan Asset Management

“Credit spreads will tell us whether investors believe the economy is in dire shape — and this was an emergency 50 basis-point cut — or whether this is just a Fed, a long way from neutral, perhaps a meeting or two away from where they should have started the cycle, so they are starting to get towards neutral. All is well,” Michele said on Bloomberg TV.

“We’re telling clients ‘just get into the bond market,’ just get into a general bond fund.

“Yields are coming down. Yields are at this level with US$6.3 trillion (RM26.66 trillion) in cash building up and most people not liking the bond market. Some buying has brought it down here and this money will come in because they’re going to watch the return on cash go down like power windows.”

Hunter Hayes, chief investment officer at Intrepid Capital Management and a co-lead portfolio manager of the Intrepid Income Fund

“We think this rate drop is very supportive for high yield and could provide a sanguine backdrop for refinancings later this year and into 2025. People tend to fixate on yield to worst in high yield. But the yield to call on a lot of these bonds is a lot more attractive than the yield to worst implies, assuming the refinancing window becomes very active. Although it’s still highly uncertain what will happen, we see a scenario where a lot of companies proactively address their maturity walls in the next 18 months and high yield as an asset class then has a handsome total return profile. This scenario seems more likely against the backdrop of these more aggressive rate cuts.”

Eric Williams, head of capital structure and senior portfolio manager at Northern Trust Asset Management

“Credit markets should react positively to the Fed’s decision to take a more proactive stance to defend the state of the US consumer. Capital markets and high yield valuations are likely to be reinforced by this decisive action going into year end.”

Noah Wise, senior portfolio manager for the Plus Fixed Income team at Allspring Global Investments

“The Fed delivered a dovish surprise with a hawkish twist. The 50 bp cut was more than what was priced into the market for this meeting, but they also increased their longer-term projection for the Fed Funds rate. What the Fed giveth, they also taketh away. This means easier financial conditions for those borrowing at the front end of the curve, but less so for those wanting to borrow at longer maturities. A little better for high yield and a little worse for investment grade.”

Nicholas Elfner, co-head of research at Breckinridge Capital Advisors

“The Fed decided to front-end load by dropping its target for the overnight rate by 50 basis points in one fell swoop. The debate over 25 bps or 50 bps became hotly contested. Recent progress on inflation has shifted the Committee’s focus more towards the job market where growth has been slowing.”

Jeff Katz, Fixed Income Portfolio Specialist at TCW

“The Fed cutting 50bps rather than 25bps is very supportive of securitised markets broadly. Agency MBS — in particular belly and lower coupons — have responded strongly with spreads tightening post the cut. The faster pace of cuts will offer relief to more levered parts of the securitised credit markets, namely CMBS borrowers who were caught offsides by the Fed tightening regime to curb inflation.”

Jimmy Whang, head of global capital markets at US Bank

“Today’s decision to start the cutting cycle supports a borrower-friendly new issue environment and will encourage some of those with 2025 needs to enter the market this year. We expect some slowdown after the early September rush, but absent an unlikely breakdown in spreads, we have a supportive backdrop for additional issuance.”

Corry Short, credit strategist at Barclays

“This should generally be viewed as constructive for supply for the second half of the year. The outlook for growth remains constructive, which should support spreads. Alongside lower yields, this should create tailwinds for deal activity. Any issuer that was debating between second half versus the first half of next year will now likely be sharpening pencils on potentially tapping the market this year.”

Winnie Cisar, global head of credit strategy, CreditSights

“While the Fed moved by 50, this is perhaps a less dovish move than the initial move would imply as the policy rate is still forecast to be in restrictive territory through at least some of 2025. At the same time, the reassessment of growth and unemployment is a bit more cautious. While we have been constructive on duration amid the move lower in yields, we are now seeing more potential for pressure there while catalysts for further credit spread compression are harder to find.”

Uploaded by Siow Chen Ming