Debt Ceiling Standoff Ending Will Push Fed To Restart Quantitative Easing, Analyst Says

If the debt ceiling dispute triggers an abrupt risk-off in financial markets, the Federal Reserve will then resume quantitative easing, as the Bank of England did in September, said Bank of America chief investment strategist Michael Hartnett in a recent report. 

Cracks are emerging in the bond market, showing growing investor anxiety over the debt ceiling standoff, as one-month T-bill yields surged to over 5.5% and one-year insurance costs against a U.S. default — commonly known as credit default swap (CDS) — hit a record high of 177 points. 

On Tuesday, Benzinga highlighted how the cost of insurance against the default of a five-year U.S. Treasury rose to the highest since 2009. 

The yield on a U.S. Treasury bill maturing in one month soared to 5.69% Friday, up 18 basis points in a day, and surging to the highest ever with data going back to 2002. 

Today Vs. 2008

Fears have not migrated from fixed income to the equities market because other asset classes are discounting a Fed dovish tilt, Hartnett says. 

In the two months following Bear Stearns' collapse in March 2008, the S&P 500 index, which is closely monitored by the SPDR S&P 500 ETF Trust (ARCA: SPY), increased 11% and the Nasdaq 100 jumped 15%. Two months after the collapse of Silicon Valley Bank, the S&P 500 is up 7% and the Nasdaq 100 is up 10%. However, the analyst noted how the two major averages reversed in the second half of 2008. 

Differently from then, defensives are outperforming cyclicals — REITs, banks, energy, and small caps are now marked with a 'hard landing'.

How To Trade A Recession

Hartnett recommends buying cyclicals if non-farm payroll NFP comes negative.

As in 2008, a recession will wreak havoc on credit and technology. Investors may wait for a negative payroll report as a buy catalyst for cyclical equities in 2023.

Next: Benzinga's 'Stock Whisper' Index - 5 Stocks Investors Are Secretly Monitoring But Not Talking About Yet

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