Major central bank activism and some sporadically good economic data in the U.S. have lifted equity markets and also helped the credit markets continue their rally. Central bank policy has been focused on an emergency bailout footing to stave off sudden panic and is also is aimed at stimulating economic activity. This has involved incentivizing households and businesses to expand and take some more risk. But no new policy initiative is perfect – not in implementation nor is it precise in its impact.
Some in the markets and even in the Fed itself worry that the massive and unprecedented easing could be causing its own distortions and perverse side effects. It has clearly triggered a chancy search for yield that may yet lead to new asset bubbles and financial instability. There are numerous examples. One is highlighted on the first page of Abraham Gulkowitz's PunchLine (chart extravaganza) and later on the credit pages. Bank lending to larger corporates has exploded, growing at rates not seen since the boom that was central to the great financial collapse.
Also, Spanish and Italian benchmark borrowing costs are now at their lowest levels since the last quarter of 2010, as these high-yielding peripheral securities have caught the attention of both domestic and international investors. While the liquidity provided by key central banks -- including the move by the Bank of Japan to initiate massive monetary easing -- will likely continue suppressing yields, there is a serious argument to be made that the rallies have moved beyond fundamentals... This increases the likelihood of more surprises, not less...
TPL May 12 13 [8]