So what happens? Can the fed release rates to decent levels again?
This is a question on everyone's mind that nobody has the answers for. Not even the Fed.
The market is overpriced on an absolute basis but not a relative basis. I still think we are in a sweet spot with the 10-year at 3% and low inflation.
Relative to what is the question. All asset classes are artificially high, just look at Sharpe ratios over the past 10 and 5-years across everything, it's pretty striking. During May - June, there wasn't a rotation into equities, there was a rotation into cash. HY has had some of their best performances ever in recent years due to historically tight spreads and historically low interest rates holding down default rates, and that asset class has seen pretty substantial inflows. How will it react when the 10-year is back at 3.5%? It's a worry that almost everyone has, where do you go? Equities may be the answer but I'm not very convinced by any means.
This post was edited on 12/27 at 3:00 pm