The price movement in credits shows that even if there is not a clear winner yet, investors have decided to continue to rely upon central banks.
Central banks have been expanding their balance sheet dramatically from the global financial crisis until today. As the economic crisis inflicted by the Covid-19 pandemic intensifies, they will most likely not be able to stop printing money. The outcome will inevitably be near-zero benchmark rates for longer and bigger and bigger bond-buying programmes. They can even contemplate engaging in even more unconventional policies, considering to start to buy other instruments beyond bonds. The Federal Reserve, for example, is already buying ETFs, therefore expanding to stocks would not be that far fetched.
As a consequence, this week, investors decided to put their money at work in assets that will benefit the most from central bank policies. Because junk credit spreads trade rich compared to investment grade's bonds, with the unlimited support of the FED, these are also the assets with the most significant upside. Hence, this explains the rise in junk assets prices.
To strengthen this thesis is the behaviour of European sovereigns that we have seen on Wednesday as a Biden win seemed less likely. Gilts and Italian BTPs have led the rally, and the only explanation for this is that investors were buying the ECB and those assets that will benefit the most from more accommodative policies. Buying the central bank might be a winning strategy in Europe still; however, it might be too late to buy the FED in the United States especially when talking about Treasuries. Even though the 10-year Breakeven rate has fallen this week supporting the Treasuries' rally, another economic shock coming from the Covid-19 will most likely exacerbate an uptick of inflation. On top of it, the next President of the U.S. regardless of whom will be will need to push through congress a stimulus package. Reflation in 2021 will be real, and near-zero interest rates will be the worst thing you might hold on. In the mid-term, however, there might be scope for more upside within higher-yielding credits, as the Federal Reserve expands its bond purchasing program and tries to save the economy.