Total time: 4:59
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Komson Silapachai: Thank you for joining us for this edition of the Sage market update. Today we're going to give you an update on the Fed, its policy, and recent market volatility. My name is Komson Silapachai. I am the Vice President of Research and Portfolio Strategy here at Sage. I’m here with Ryan O’Malley, who is our Fixed Income Portfolio Strategist.
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Komson: So Ryan we had a really big sell-off going into the end of last year, a huge amount of market volatility. Going into January, the start of this year, has really been the reverse. I think one of the biggest drivers of that has been Fed policy. You know, you saw going into the end of last year, around mid-month, everyone's waiting for Powell and the Fed to come in and rescue the markets with accommodative policy, to say something about pausing and 2019 in order to allay some of the volatility going into the year. That did not happen. You know, he really effectively ignored all market volatility in December. And so you really had a big risk-off going into 2019. That all changed on January 3. In a panel discussion, Powell did a 180. He talked about how volatility, the markets were really at the forefront of what the Fed was looking at. He really talked about all kind of policy options being on the table in terms of pausing. And so the markets really took that as a positive. And you really saw a follow-through from all the other fed governors as well, all the other members of FOMC. I think I've counted seven or eight speeches and appearances since then, and all of them almost unanimously have mentioned flexibility and the fact that the Fed can afford to pause here. And so I think the message is loud and clear. And you're seeing that in stock prices. And Ryan, what are you seeing credit markets in terms of how it's reacted to the Fed doing a 180?
2:01
Ryan O’Malley: Yeah, I think you're right. You know, just going back to the end of December, just for a quick second, the mood, the sentiment felt pretty bad. Not only were prices selling off, you’ve got bond spreads widening, stocks were going down, but no one can get anything done. And that's one of the big things we look at on the taxable desk here is, are there new deals coming into the IG space, or in high-yield, are people or companies able to refinance their debt? When they're not, that gets pretty scary because it reminds a lot of people of 2008, when deals weren’t getting done, and companies had a hard time refinancing their debt. Since the Powell Pause, as it's come to be known, that's completely reversed. I think the best example of that is the energy sector. I think the energy sector has tightened back about 20 basis points, nearly twice what the rest of the investment grade sector has done. And there's an energy company called Targa Resources that is a high-yield pipeline operator, and they brought a new deal last week. It was supposed to be $750 million; they upsized it by double to $1.5 billion. That's a pretty big deal, and a pretty big vote of confidence. That deal has since done very well. It's about 30 bps tighter on the spread side, it's about one to two points higher. The reason I bring up the energy thing is a couple reasons. Energy is a really big part of the high-yield index; it's about 20% of the index. If you remember back to 2015, 2016 during the oil price bust, you know, energy was the hardest-hit sector. And it kind of led the whole index down. So the fact that energy can price a new deal, and have it do so well, and be upsized by a factor of two is huge from a sentiment standpoint. Also, it kind of points to the fact that global growth expectations have kind of re-emerged. You know, one of the reasons that high-yield and even IG sold off so much in the fourth quarter was that oil prices went from a high of about $70 in September to a low of around $42 – we're talking about West Texas Intermediate here. And part of that is too much inventory, too much supply. The other part of it is people had started to worry about demand growth trends. And so I think the fact that there's such a big vote of confidence in this one deal, maybe it’s a sign of bigger things.
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