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Financials have a weight of almost 50% in the European IG index and 33% in the US IG index, see chart below. For the high yield index, financials also have a higher weight in Europe than in the US. For the US, the sectors with the biggest weight in the HY index are consumer discretionary, communications, and energy.
Source: Bloomberg Barclays, Bloomberg, Apollo Chief Economist 
Source: Bloomberg Barclays, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Ninety-one percent of US investment grade bonds are trading below par, see chart below.
Source: Bloomberg, Apollo Chief Economist. Note: Data used for members in the LBUSTRUU Index. See important disclaimers at the bottom of the page.
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Modified duration measures the expected change in a bond’s price to a 1% change in interest rates. The charts below show that since the Fed started raising rates, index duration has declined both for high yield and investment grade, with high yield duration currently standing at 4% and investment grade duration at 7.5%.
Source: Bloomberg, Apollo Chief Economist. Note: The measure used is modified duration, which measures the expected change in a bond’s price to a 1% change in interest rates. 
Source: Bloomberg, Apollo Chief Economist. Note: The measure used is modified duration, which measures the expected change in a bond’s price to a 1% change in interest rates. See important disclaimers at the bottom of the page.
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Twenty percent of the high yield index trades with yields higher than 10%, see chart below.
Source: Bloomberg, Apollo Chief Economist. Note: HY bond universe is H0A0 Index. See important disclaimers at the bottom of the page.
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The high and rising share of small-cap companies with negative earnings makes middle-market companies more vulnerable as the Fed keeps interest rates higher for longer, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Imports are falling, and this normally only happens when the economy is in a recession, see chart below.
The weakness in the goods sector is offset by continued strength in the less interest rate-sensitive service sector, which makes up 80% of GDP.
Source: BEA, FRED, Apollo Chief Economist See important disclaimers at the bottom of the page.
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There are a total of 45 million people with student loans, and the average monthly student loan payment is around $200. So resuming student loan payments in October will subtract roughly $9 billion from consumer spending every month, or roughly $100 billion a year, and this will mainly have an impact on younger households, see chart below.
Source: FRBNY, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Total employment in the US economy is currently around 156 million, and we estimate that total employment of companies in the high yield index is 11 million, and total employment of companies in the leveraged loans index is 8 million, see chart below. With interest rates staying high for at least another year, the downside risks to employment continue to be meaningful.
Source: Bloomberg, ICE BofA H0A0 Index, Morningstar LSTA Index, Apollo Chief Economist. Note: Data includes 858 companies in the HY index with employment data available for 589 companies and median employment assumed for the rest. Similarly, there are 1059 companies in the leveraged loans index with employment data available for 451 companies and median employment assumed for the rest. See important disclaimers at the bottom of the page.
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With yields going up in Japan, the risk is that Japanese investors will now begin to sell US fixed income and start buying higher-yielding Japanese fixed income.
This is a big deal for global fixed income markets because Japanese investors are the biggest foreign holder of US Treasuries, and they also own significant amounts of US credit.
Our updated BoJ YCC exit chart book is available here, a few key stats:
- Japan is the largest holder of US Treasuries in the world, see the first chart below.
- The BoJ owns more than 50% of all JGBs outstanding, see the second chart.
- BoJ JGB buying has been a dominant force in markets for the past decade, see the third chart.
- Because of the significant yield differences in the front end of the yield curve between the US and Japan, the hedging costs for Japanese investors buying US Treasuries are very high at the moment, see the fourth chart.
- Also, this BoJ illustration of their policy change shows how they will now do “YCC with greater flexibility.”
All other central banks in the world, including the Fed, ECB, BoE BoC, and RBA, have aggressively raised short-term interest rates to get inflation under control. The BoJ has not raised short-term interest rates, and abandoning YCC is the BoJ’s response to high inflation. The BoJ YCC policy started in 2016.
Source: Bloomberg, Apollo Chief Economist 
Source: BoJ, Bloomberg, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The Fed has used the Taylor Rule framework for decades to understand what the Fed funds rate should be, and inserting the current level of inflation and unemployment into the Taylor Rule shows that the Fed funds rate today should be 9%, see chart below and our Daily Spark here.
The ongoing gap between the Fed funds rate predicted by the Taylor Rule and the actual Fed funds rate raises the question whether the Fed remains behind the curve. In other words, if the economy reaccelerates over the coming quarters with higher consumer spending and a boom in housing, it will increase the risk that the Taylor Rule was right and that the Fed will have to continue hiking.
In sum, for markets to continue to trade higher, the soft landing must be a soft landing, not a reacceleration, because if housing and consumer spending accelerate from here, the Fed will have to raise rates a lot more.
Source: Bloomberg, Fed SEP, Apollo Chief Economist. Note: Taylor Rule calculated using TAYL <GO> function on Bloomberg. See important disclaimers at the bottom of the page.
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