What's driving higher rates worldwide?

Inflation expectations have continued to be very stubborn. Inflation's continued to be very sticky in here. And this goes beyond even the energy effects of the Iran War. You think about shelter, you think about health care, food, we're seeing inflation pop up everywhere. And that's led to a reset of global interest rate expectations.

Markets are expecting higher interest rates in the short end of the curve. And so that's really reset interest rates across all global curves higher in here. So the US is not the only country that's really seeing these inflation expectations go higher and sticky inflation. we've really seen this

In a number of different areas, and that's really helped push rates up. I would also say that as we continue to see deficit spending and significant issuance of sovereign debt across the entire globe, there has been a reset again of expectations from investors about what they want to get paid to own sovereign debt. And so the US is not the only country running large physical deficits at this point in time.

You look at what Europe's doing both with defense spending increases and also clean energy spending. And then recently Japan announced that they're looking to double defense spending on top of stimulus packages that they've already had in place that have been debt funded as well. So I look at that as another reason why we've seen expectations and really global rates move higher in the recent future. I also look at the large amount of

AI, high quality corporate debt exposure that's come to the market this year from some of the really high quality hyperscalers, companies like Google, companies like Meta, Microsoft, and others. And so that really has acted as almost a competitor for capital with the US Treasury market.

I would also point to some of the mixed messages that we've gotten out of the Federal Reserve over the past couple of months, whether they're going to be vigilant about fighting inflation by raising interest rates or not. the Fed did just recently raise rates in September.

And so perhaps that mixed message is going away and perhaps they're gaining back some credibility. and I'd also look at what some of the statements have done from the Treasury as well with Secretary Bessant and his line in the sand given yen intervention. And I do think that there is a link between the yen intervention talks and also the correlation with the US Treasury market. If I'm thinking about this from the Japanese standpoint.

The Japanese are going to have to defend their currency, and in some cases that may mean selling U.S. treasuries. So if Secretary Bessant wants to step in, call himself the House, and draw a line in the sand as far as weakening of the yen by speculators, perhaps that also keeps the Japanese from having to sell long Treasuries. But all of these things have added to the uncertainty around the direction of interest rates, and largely we do think that

This move higher in here has been justified and really brings us back to a period of time before QE where you know real rates and also term premiums were larger in the markets. And so the markets continue to readjust and have a higher rate expectation at this point in time.

We've seen a a really strong improvement in earnings expectations, but also profitability continues to be really strong in the US corporate market in here. Also look at profit margins, which are the strongest since 2022. Interest coverage continues to be good as well. And then leverage was actually slightly down if you look at investment grade corporate bonds during the course of the last quarter. So

The bottom line is the underlying fundamentals of the U.S. corporate market continue to be really strong at this point in time.