Economic Data Allay Fears in Market
November 1, 1999
Wages and benefits for American workers rose by 0.8% in the third quarter, according to a report released last Thursday by the Labor Department, which could be beneficial to high yield investors in the long term.
The gain in the employment-cost index was slightly below the 0.9% rise expected by economists surveyed by Thomson Global Markets, indicating that labor price pressures were not soaring up to inflationary levels.
"As the ECI impacts the broader markets, it'll impact our market. Right now, stocks and bonds are rallying, and if stocks and bonds continue to rally, it will help our market in the long-term," said portfolio manager Tom Haag of the Lutheran Brotherhood.
While Eric Stephenson, director at Fitch IBCA, called this economic indicator the [foundation] of the high yield market" because of its correlation with the consumer and producer price indices, others were slow to react to the "positive" figures.
However, the positive ECI numbers may indicate the high yield market will not be driven further downward by inflationary pressures.
"If the ECI is right, it tells me labor costs are not affecting profits or cash flows. The upside is that potential for avoiding a federal tightening slightly improves, and that the supply of credit and willingness on the part of investors to return to the high yield market is still there," said John Lonski, chief economist at Moody's Investors Service.
Fears of inflation and a possible interest rate hike at the Federal Reserve's next Open Market Committee meeting in mid-November have been circulating among buy and sell-side players for weeks.
Investors have been talking of selling the less liquid names in their portfolios and accumulating a larger cash reserve base through year-end.
"It's getting to a point among key investors that (a) they're tapped out or (b) unless a deal is very-well priced, they're closed for business for high yield credit," said Stephenson.
Analysts, on the other hand, have speculated that such fears have clogged the pipeline for new issuance, pointing out that no high-risk issuer has come to market in the last quarter with a coupon below 12% and equity options of 3% to 5%.