The Federal Reserve's decision to maintain interest rates steady on Wednesday was accompanied by the fact at least one rate cut could be possible this year, according to the Fed's dot plot.

Joining Catalysts to discuss the implications for the credit sector is the Citigroup Head of U.S. Credit Strategy Michael Anderson.

Anderson acknowledges that "markets have tightened a lot," leaving little room for further upside in the current credit market landscape. He emphasizes that the credit space is primarily driven by fundamental factors, and a potential catalyst for these markets could be a Fed rate cut. However, Anderson raises an important question: "When the Fed cuts rates, why are they cutting rates?"

Regarding investment opportunities in the credit sector, Anderson suggests that if a rate cut were to occur in a "soft landing" scenario, it could "compel more investors to come into our asset classes," opening more avenues in the credit space.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Angel Smith

Video Transcript

The vet holding rate study this week now only signaling one cup before the end of the year.

The equity market still digesting that latest commentary.

Our next guest saying that the credit market is in more of a holding pattern and the low market could soon maybe be due for pricing.

Let's talk about it where the investment opportunity is.

We've got Michael Anderson, he's citigroup's head of us credit strategy, Michael.

It's great to see you.

So let's first just take a step back when we take a look at what we heard from the Fed this week.

That lack of reaction maybe that we saw play out in the credit market.

What do you attribute that to?

Yeah, a lot of it is just due to the fact that the markets have tightened a lot, there isn't a lot of upside in either the high yield or the loan market.

Uh So if you think about the high yield markets in terms of spread, the spread has been locked around 300 basis points in a very narrow range for the last three or four months.

And of course, we've seen a lot of volatility in recent years.

And then on the loan side, you know, loans are floating rate assets.

Uh, they are also called at par generally very quickly after new issue.

And so with the vast majority of the low market trading above par, there isn't a whole lot more uh that it can go up so risky assets generally were cheered by the inflation news and, and, and, and, and to some extent, the fed.

Uh, but, uh, but for the most part credit right now is there just isn't a lot of upside to participate in, in uh in, in a rally.

So then Michael, what questions are you getting from clients specifically regarding kind of the path to rate cuts as it does start to become a little bit clearer?

What are they asking you about next moves and potential catalysts in the credit space?

Yeah, I mean, well, first on the fed side, our, our econ team is expecting the fed to cut in September and then to continue to cut in successive meetings.

After that, they are definitely more embarrassed than the street is on the economy.

Um So that's going to drive sort of the, the fed policy.

But as far as the credit markets are concerned, it's more of a fundamental story.

Um You know, these, these are asset classes that traded to spread over treasuries and those spreads are very tight right now, as I mentioned before, I'd say that the, um you know, the, the real question is is when the fed cuts rates, why are they cutting rates?

Are they cutting rates because we're heading into a recession?

And we've certainly seen some softening of data particularly in the labor market recently.

Uh So there are good reasons to be, to be watching that very, very carefully or are they cutting rates because you have this, what economists call, immaculate disinflation and that you get the soft landing and that the FED is able to cut rates on, on, on, on their own and, and then that hopefully that will further ease financial conditions for companies and, and, and, and compel more investors to come into our asset classes.