1/ Update on the Merrill Lynch credit spreads.
Before I update you guys on the spreads I'm looking at with a few interesting charts, I have to say I'm very surprised at the strength in the Junk Bond ETF today.
$HYG
Before I update you guys on the spreads I'm looking at with a few interesting charts, I have to say I'm very surprised at the strength in the Junk Bond ETF today.
$HYG
2/ US high yielding credit spreads peaked around 11% spread over similar-maturity Treasuries a few days ago.
Currently easing off a little.
As its reported, that was the fastest widening in the history of the junk bond market.
From 3 & change to 11 points in a matter of weeks!
Currently easing off a little.
As its reported, that was the fastest widening in the history of the junk bond market.
From 3 & change to 11 points in a matter of weeks!
3/ From a contrary perspective, an extreme credit spread over Treasuries is a signal that, eventually, we should be going long equities.
The only question is how far does the widening spread keep going, before its time to buy?
1990: 12.9%
2002: 10.4%
2008: 21.3%
2016: 8.6%
The only question is how far does the widening spread keep going, before its time to buy?
1990: 12.9%
2002: 10.4%
2008: 21.3%
2016: 8.6%
4/ Turning the focus on European credit spreads shows a decent widening move but nothing dramatic compared to 2000-03 and 2007-09.
Meanwhile, EU equities continue their 13-year consolidation. $VGK
Meanwhile, EU equities continue their 13-year consolidation. $VGK
5/ Asian Junk Grade spreads have been widening since January 2018 — a very important starting date for the global equities ex-USA bear market.
Judging by today's market action, and outperformance of US vs Asian stocks, I would assume these spreads have further to widen.
Judging by today's market action, and outperformance of US vs Asian stocks, I would assume these spreads have further to widen.
6/ Finally, focusing on the low-quality CCCs and lower credit, the widening looks like a Bitcoin bubble from a few years ago. Straight to the moon, as they say.
How does it compare to some of the previous blowouts?
2002: 24.6%
2008: 44.3%
2016: 20.5%
How does it compare to some of the previous blowouts?
2002: 24.6%
2008: 44.3%
2016: 20.5%
7/ As an investor, I personally like to bet big when the equity and credit markets disagree. I tend to follow the credit markets, but either could lead.
Here are a few examples...
Here are a few examples...
8/ The complex triple bottom in the US stock market had a fantastic clue at the end of the bear run.
Credit finally started improving, while equities were still weak. This divergence was a great buy signal.
Credit finally started improving, while equities were still weak. This divergence was a great buy signal.
9/ We saw a similar setup in the late stages of the GFC.
As government bailouts & central bank QE programs started in late 2008, equity prices remained weak into the Q1 of 2009.
However, corporate credit never really confirmed this move, giving us a strong buy signal.
As government bailouts & central bank QE programs started in late 2008, equity prices remained weak into the Q1 of 2009.
However, corporate credit never really confirmed this move, giving us a strong buy signal.
