Mizuho Securities: The Federal Reserve does not need to cut interest rates significantly, the corporate lending environment is already very loose
Mizuho Securities analysis believes that the Federal Reserve does not need to cut interest rates significantly, as the corporate lending environment is already very loose. The analysis mentioned that the main corporate bond spreads are at historically low levels, and credit remains ample. The report points out that although spreads have shown a moderate increase recently, the overall credit conditions remain strong, and the stock market performance is rising. At the same time, the market is awaiting an important speech from Federal Reserve Chairman Powell
According to the analysis from Mizuho Securities reported by Zhitong Finance APP, the Federal Reserve may not need to cut interest rates significantly. The Mizuho Securities team of economists in the United States pointed out in a report to clients on Monday that a key financial market condition indicator shows that the borrowing environment for American companies is already very loose, and the economy still has ample liquidity.
Despite various indices and indicators helping to track the degree of looseness or tightness in financial markets, the Mizuho team still pays attention to a simple credit condition indicator, namely the spread of corporate bonds for major American companies.
The spread is the difference between the return investors get on investment-grade corporate bonds and the "risk-free" government bond rate. Even with the sharp market volatility in early August, the spread of investment-grade corporate bonds remains at historically low levels of less than 100 basis points. This indicates that credit remains abundant.
The Mizuho team wrote in the report, "This not only allows companies to expand their business, but also provides management with a signal about the potential strength of the economy, as the spread reflects risk."
Similarly, the spread of high-yield or "junk" corporate bonds has recently remained in a low range of around 330 basis points above the risk-free government bond rate.
The team pointed out that despite a mild increase in spreads after the (July) employment report was released, most of the increase has been recovered. More importantly, even with varying corporate profit performance from bottom-up, the spread of investment-grade bonds remains unusually narrow.
The 10-year U.S. Treasury yield on Monday approached 3.88%, almost unchanged, lower than recent highs and far below the peak of 5% in October last year.
The U.S. stock market also showed some gains, with investors awaiting Federal Reserve Chairman Powell's speech at the Jackson Hole Economic Symposium on Friday. The S&P 500 rose by 0.97%, the Dow Jones Industrial Average rose by 0.58%, and the Nasdaq Composite Index rose by 1.39%.
Major U.S. bond exchange-traded funds holding corporate bonds have risen significantly compared to a year ago. According to FactSet data, as of Monday, the year-to-date return of the U.S. Total Bond Market ETF (AGG.US) was 3.16%, the Bond Index ETF (LQD.US) rose by 7%, and the High-Yield Corporate Bond Index ETF (HYG.US) rose by 6.5%