The Citrix buyout debt sale is a warning for credit markets. Banks bore significant losses ($600 million) in a debt sale that will lead to a retrenchment in lending to riskier companies and private equity firms, at a time when the Fed is aggressively hiking.
The significant cutback in subscription-line financing by Citigroup to private equity firms may mark a turning point in sentiment towards private markets. This may also negatively affect internal rate of return estimates used by private equity, leading to more selling by pension funds and other investors as they begin to question the underlying business model (searching for higher returns in risky assets, as government bond yields fell).
Domestic services inflation in the US is not yet under control. The services ex-energy PCE price index increased 0.56% m/m in August: the annual rate accelerated from 4.35% to 4.66%. Initial claims have dipped below 200k again, down 16k to 193k in the week ending September 24th. Federal Reserve rate hikes are colliding with global disinflationary impulses sweeping through the traded goods sector and housing. This confluence will continue to be negative for stocks.
US breakeven inflation rates are sliding across the curve. The 5-year breakeven inflation rate dipped to 2.14% on Friday. Disinflation will be the theme through 2023. Break-even inflation rates will continue to fall but indexed-linked yields will rise. Nominal yields are unlikely to fall quickly enough to bail out leveraged investors, because government borrowing remains too high.
