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Credit Insights

Almost Seven Years Later and It's Still All About Central Bank Liquidity

Indicative of the demand for corporate bonds, fund flows in the high-yield sector increased $0.6 billion.

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The buy-the-dip crowd came out in force last week, and traders were stunned by the pace of the snapback. The turnaround was driven by a combination of bad-news-is-good-news logic (weak economic metrics will force central banks to keep the liquidity spigot open) and a good-news-is-good-news theme as commodity prices stabilized and then rose higher, driving a V-shaped rebound in bond prices in the energy and metals and mining sectors. For example, in the United States, the employment report the prior week dramatically missed expectations and the prior month was revised sharply downward. Although there are two more payroll reports before the December Federal Open Market Committee meeting, the market is pricing in a higher probability that the Fed won't begin to raise the federal funds rate until well into 2016, based on the poor showing in employment data. Considering that the FOMC does not have a press conference scheduled for the January meeting, if it does not raise rates in December, then the next most likely action would not be until March.

In the eurozone, headline inflation dipped into deflationary territory, which prompted reports that the European Central Bank may need to increase the size and duration of its quantitative easing program. The Bank of Japan held off on expanding its monetary easing program in early October but is widely believed to be considering additional monetary stimulus at its next meeting. Expectations are that the BoJ will cut its long-term economic forecasts. In an attempt to stem the decline in property prices, China's regulators reduced the minimum down payment required by first-time homebuyers. Property prices in China have continued to decline over the past year despite several interest rate cuts and decreases in reserve requirements.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.