Week of May 15, 2023
Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation
The political rhetoric around the U.S. debt ceiling turned positive this week as President Joe Biden expressed “confidence” there would be no default. Meanwhile, House Speaker Kevin McCarthy also chimed in that reaching an agreement this week “is doable.” And while Biden is attending the G-7 summit this weekend in Japan, he is cutting his attendance short to return to Washington to closely shepherd debt negotiations.
But a lot remains to be done, and a temporary extension of the debt ceiling seems likely. That would allow more time to iron out a more comprehensive bill. In an effort to make progress, both sides agreed to a narrower round of staff-level talks to help work out the issues.
The Treasury Department continues to remind lawmakers that it could run out of money by June 1. However, that date is fluid. If, for instance, the Treasury can continue to balance the books until mid-June, absent a deal, it can also extend its runway as it receives the typical bulge of second-quarter estimated tax payments.
In our view, markets have been relatively calm. Stress is evident in Treasury bill yields centered around the June 1 date, but beyond that markets are behaving like it is business as usual. While this behavior is reasonable, it does set markets up for a shock if politicians are indeed further apart than the headlines suggest.
Source: Bloomberg, Financial Times, 2023.?
?
Kevin Quinlan, MBA , Director, Climate
Negotiations over the U.S. debt ceiling have taken on added urgency for clean energy advocates, with the Inflation Reduction Act (IRA) becoming a bargaining chip. In April, Speaker McCarthy offered to support raising the debt limit provided several clean energy tax credits in the IRA – the Biden administration’s signature climate policy – were repealed.
The IRA has become a target in part because of its uncapped tax credits. In the eight months after the bill was passed, $150 billion in utility-scale clean energy projects have been announced – more investment than the past five years combined. While the Congressional Budget Office originally pegged the 10-year cost at $391 billion, other estimates now have it upwards of $1 trillion. Demand for the tax credits for wind and solar power, battery storage and electric vehicles could be far stronger than estimated.
Whether the IRA gets brought into a final debt package remains to be seen. As politicians go down to the wire on negotiations, another threshold approached this week: the World Meteorological Association reported the Earth could temporarily breach the 1.5 degree threshold in the next five years. That’s the point at which global heating leads to major tipping points, accelerating forest fires, floods and droughts into uncharted territory.
Not unlike a U.S. debt default, that’s a threshold that, if crossed, could have broad-based impacts.
Sources: Politico, Bloomberg, New York Times, CNN, 2023.
?
领英推荐
Melissa Boulrice , Senior Director, Asset Management, Public Fixed Income
Canada’s April Consumer Price Index print this week surprised to the upside, bringing year-over-year inflation up a tick to 4.4% compared to expectations of a drop to 4.1%. Gasoline prices and higher rent and mortgage interest costs were the main drivers, while wages continue to increase and should remain closely monitored. The market responded accordingly as two-year yields shot up 16 basis points. A rate cut this year, which had been priced in for December according to overnight index swap (OIS) markets, is now off the table. Instead, a hike in June or July is now a possibility. The Bank of Canada’s expectation for inflation “to come down quickly to around 3% in the middle of 2023,” according to their April Monetary Policy Report, may have been too optimistic if this sticky inflation continues.
Source: Bank of Canada, Bloomberg, 2023.
?
Andrew Kleeman , Senior Managing Director, Head of Corporate Private Placements
In our view, there are many features that make the investment grade (IG) private credit market attractive as a source of capital. It can serve as a source of long-term, fixed rate capital. It’s typically open when other markets are closed during periods of volatility, and innovative and creative structures are often launched in the private credit market. We can add another feature to the list which has been evident since 2020 – capacity. From 2015–2019, the IG private credit market averaged just over four deals per year in excess of $1 billion. In 2020 and 2021 there were 10 and 17 deals in excess of $1 billion, respectively. While large deal issuance in 2022 was more typical as rising rates dampened issuance, there have already been eight deals this year in excess of $1 billion.
Driving the number of large deals and boosting the market capacity are new investors, including large, sophisticated asset managers, as well as longtime insurance company investors that, because of a premium spread, strong structures and covenants, have increased their allocation to the asset class. While new investors have increased competition for deals, additional market capacity has also enabled the private credit market to compete for larger deals that may have previously gone to other markets.
Source: Private Placement Monitor, 2023.
Market insights are based on individual portfolio manager opinions and market observations. These are observations only and are not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not?constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information posted here.
SLC-20230519-2912104