Economic cracks did appear after the first quarter. The covid pandemic lead to the extreme loosening of the monetary policy and a surge in the money supply. With liquidity being cheaply available it was easy for risky assets to gain in popularity and therefore witness one of the strongest bull runs in recent times. But as it is said, the higher they go the harder they fall. 2022 saw one of the worst years for the 60/40 portfolios. We are currently facing one of the deepest inverted curves seen in more than 50 years and the crisis is still not over. This has caused the fed to raise the rates at the fastest pace in 40 years while trying to cool down inflation which is proving alot sticker than most expected.
The Fed insists that there is no impact on credit creation however we saw the fastest pace of credit reduction in the market in the last two week ever witnessed. With the current CPI coming in cooler than anticipated the fed is still more likely to increase by 25 bps.
A positive aspect of these high rates could be that fixed income is finally attractive to many investors due to the risk free assets providing such high yields they do not need to put their money into risky assets while getting the same level of return for a given level of risks. This would be a major benefit for fixed income investors.
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