Two years ago, Dudley was spooked by tightening financial conditions. Now, they can’t figure out why they are so loose.
I think there is a simple explanation. Two years ago rates were so low that credit could not go any lower, as they would go below the default rate. So it looked like financial conditions tightened. Now, as the fed raises rates, credit has stayed at the same price, so it looks like financial conditions are getting looser. Here is a chart of auto loans. Rate has not changed. Unless the central banks buys credit (as they have done in Europe, forcing HY below UST), the nominal rate cannot go any lower, but won’t go up right away either. If you are at the default bond in credit, do measures of financial conditions fail to make sense?
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