Monday Market Minute | Jul 29, 2019

Fed cuts rates for first time since 2008 — global easing cycle begins

What Moved

The Federal Reserve cut its federal funds rate by 25 basis points to a target range of 2.00-2.25% on July 31, the first reduction since December 2008. Chairman Powell characterized it as a "mid-cycle adjustment" rather than the start of a cutting cycle, though markets were skeptical. The ECB had already signaled further easing, and over 20 central banks globally had cut rates in 2019. Global bond yields fell further, with US$15 trillion in negative-yielding debt worldwide.

Why It Matters

The global easing cycle had profound implications for private markets yield seekers. With sovereign and investment-grade corporate bonds offering diminishing returns — and in many cases negative real yields — private credit's 7-12% return profile became increasingly compelling. Capital was being pushed up the risk spectrum, and well-structured Canadian private credit with tangible asset backing represented one of the few remaining sources of meaningful positive real yield.

Signal to Watch

Whether the BoC would follow the Fed's lead was the critical question for Canadian markets. Governor Poloz had signaled no such intention, but sustained Fed easing would pressure the Canadian dollar higher, potentially forcing the BoC's hand if export competitiveness suffered.

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