A little late with this week’s chart, but the last couple days have been critical in making this point — With interest rate spreads reaching levels that investors have not witnessed since the pre-crisis era, and in the case of Europe all-time wide measures, some wonder if this may be a precursor to an imminent market event. This cycle may be different. The US Federal Reserve will likely remain highly transparent as they reach what they consider to be neutral policy rates several quarters out. The wild card could be the ECB, and their interest rate trajectory and QE management in what we view as a fragile economic environment. Our sense is that central banks will tread very carefully as they manage policy rates upward, keeping in mind the precarious global economic state. The risk, from our perspective, is that further out, extensive monetary policy may create another adverse market event.
