The direction of interest rates has been the main driver of primary bond markets for some time, propelling strong issuance in all fixed income asset classes for most of this year.
The forceful downward direction of rates is especially good for credit — and the market should be grateful, because inflationary threats are everywhere.
Last month's Federal Reserve rate cut may signal that central banks have fought off the bout of inflation that took hold after the pandemic, but the malady could strike again as conflict escalates in the Middle East, risking energy price rises and disruption of trade routes.
Western markets, though at some geographical distance from the two war zones, are not insulated.
Further east, China has launched a big stimulus to jumpstart its slowing economic engine.
Inflation threats loom in the US too. Strikes have gripped 36 of its major ports and tariffs are constantly discussed in the contest to be the country's next president.
None of that bodes well for credit issuers — namely companies and the banks that make money from financing them.
But for now, investors are certain that rates have further to fall. That is turbo-charging demand for credit, as evidenced by this week’s appetite for Commerzbank’s high yielding additional tier one note.
The higher the yield credit products offer over securities in the rates market, the further they have to tighten as rates fall.
Credit issuers should take note, as some banks have already, by speeding up their pre-funding. Companies should follow suit to take advantage of this rare macroeconomic blessing.