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Morning Notes — And Now High Yield Spreads Narrow

And Now High Yield Spreads Narrow

March 24, 2020

The current environment includes two out of three preconditions to broadly re-entering risk markets: 1) markets are now priced for recession and; 2) equity positioning is extremely underweight. What’s missing is a decelerating US infection rate, which could be ~3-4 weeks away. But as noted over the past week, extreme bearish sentiment and positioning can lead to ~10-25% rallies, even during cyclical bear markets. The spring has been pulled tight and a ~$2T US fiscal package could be the trigger. The two sides continue to work out the details, but the centerpiece for markets looks like a $400B+ Treasury’s Exchange Stabilization Fund (ESF) for Fed liquidity facilities. In less than 2 weeks, the Fed has already put massive liquidity measures used during the financial crisis. And with the ESF, the Fed has another ~$4T in liquidity to further stabilize markets.

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