Shares are down today as the FANG stocks retreat due to investor concern about growth companies in a period of rising rates. This is only a one-day impact though. The question is whether the caution regarding riskier assets will endure.
No sign this is risk-off yet
Earlier today, I made the point that a higher discount rate from rising interest rates is largely offset by likely higher earnings in a higher growth scenario. To the degree that long rates are rising because investors no longer fear the Fed will squash the economy, we should expect investors to also be optimistic about earnings growth. So I am sceptical that we are going to see risk off here.
Instead, what I’ve been saying is that bear steepening is only bearish when the credit cycle turns. And we’re not there yet — just the opposite, actually.
As investors piled into loans for protection against higher rates, loan funds have received more than $16 billion in cash so far this year, according to Lipper. On top of that, institutional money flooded into separately managed accounts and collateralized loan obligations, which have scooped up loans at a record pace.
“The moves in the 10-year — and the attention they’re getting — should serve to bolster sentiment within the leveraged loan space, as investors focus on the potential for rates to move higher,” said Jon Poglitsch, head of credit at Highland Capital Management. The yield spike “brings the value proposition of floating-rate debt in this environment front and center,” he said.
So, leveraged loans are going to be bolstered by rising rates, not diminished. It’s only when credit distress seeps in that we will see a change.
In short, overnight, we’ve gone from a situation of bear flattening, which is actually worrying, to bear steepening, which I see as a misnomer regarding the short-term effects. That makes me more bullish, not less bullish. And this extends to high yield, leveraged loans, and equities. The day of reckoning is not upon us yet, not by a long stretch.