New York | Watching the related financial dramas of China’s HNA Group and Germany’s Deutsche Bank AG (DB), we are reminded of Timothy Dickinson, who reminded us that the image of purposeful design and order imposed from above by experts and regulators is largely an illusion. The world is filled with ill-considered people and strategies, and no realm more than the intersection of public policy and corporate governance.
The Federal Open Market Committee is raising short-term interest rates as though it matters, yet in fact Fed policy remains relatively easy in terms of the cost of credit -- the duration. The problem comes because of the scarcity of assets, one reason why high-yield credit spreads have been tightening even as short term funding rates have risen. And the fat part of the Fed’s passive portfolio runoff is in the mid-2020s and thereafter. The chart below shows "AAA," "BBB" and high yield bond spreads.
Of course, everybody is so excited by the move of the 10 year Treasury bond to a three percent yield. The move of the short end has been even more pronounced, however, one reason why so many banks are reporting shrinkage in net margins even as shareholder payouts of capital surge. The FRED chart below shows Federal funds, Treasury 2s and 10s. Imagine Fed funds at 2% and Tr