SCHQ - Interest Rate Expectations

2023-04-25 13:10:00 ET

Summary

• The American investing public doesn’t pay much attention to credit default swap pricing, but professionals watch it daily.
• The CDS on the US must be priced in a currency other than the US dollar if its purpose is to achieve a market-based pricing on the creditworthiness of the US.
• We have raised cash in the US Equity ETF portfolio.

Discussion on the Monday morning internal portfolio-management strategy call within Cumberland included this quote, which I lifted from a Bloomberg Monday morning piece:

"Some 87% of 331 survey respondents expect the Fed to cut interest rates to 3% or below - some significantly so - in a loosening that 40% believe will start this year, according to the latest MLIV Pulse survey. That stands in contrast to market pricing that puts the implied policy rate around 3.05% in two years."

Note that this is an internally driven survey by Bloomberg via the terminal. That means the respondents are terminal users and therefore likely to be skilled professional investors rather than the general public.

My colleague David Berson chimed in with this addition:

"And the differential is even bigger compared with the median fed funds projection from the FOMC:

December 2023: 5.1%
December 2024: 4.1%
December 2025: 3.1%

Someone is going to be very wrong."

Meanwhile, Steve Matthews, a Bloomberg journalist, tweeted a message that included John Authers' Bloomberg chart showing that the credit default swap (CDS) on the US is now priced higher than it was at previous peaks, including the peak in 2011 when the debt ceiling fight was heating up, as it is again today.

The American investing public doesn't pay much attention to credit default swap pricing, but professionals watch it daily. The reason may be that the CDS on the United States is priced in euros. It must be priced in a currency other than the US dollar if its purpose is to achieve a market-based pricing on the creditworthiness of the US. If it were priced in USD, it would be measuring the creditworthiness of ourselves by us.

My conclusion, offered on our morning call, is "Something has to give."

We have raised cash in the US Equity ETF portfolio.

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