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Editor's letter: Chill wind after joy of spring

After the bleakest of winters, springtime in the debt capital markets was an especially joyous affair. In April and May there were record new-issue volumes in the US and a revival of the European market. That is good news for large financial institutions and the big underwriters.

The importance of a functioning new-issue market cannot be understated. It is primary issuance that creates transparency and pricing, helping secondary market trading. Regardless of whether the new issues are cheap, expensive or priced fairly, the key is that – at that moment, for that issuer – there is a clear price in the market for a very large transaction. From that follows the relative pricing of different issuers and structures.

The return of some liquidity is also good news for credit valuations. Much of the credit market is not actually impaired but trading at distressed levels mostly because of widespread nervousness and the absence of once price-making leveraged investors, who now have no access to funding.

The debt capital markets thawed when fears that systemic problems would overcome the global financial system faded. But they are not in the clear. The air of relief was tempered as credit spreads started widening again in late May. The catalyst was the release of the minutes of the Federal Open Market Committee meeting in April when rates were cut. It is clear the Fed has inflation in its sights and that further rates cuts are unlikely.