Whenever the equity market is having big moves to the upside or downside, it often helps to compare the move to trends in the credit markets, and more specifically high yield credit spreads. When the equity market is rising, we should see spreads on high yield bonds contract, and vice versa when the equity market is declining.
With this in mind, the recent widening of spreads in the high yield market is a potential red flag. According to Merrill Lynch indices, high yield spreads widened out to 739 bps yesterday and took out the highs from last Summer (727 bps). At the same time, the S&P 500 is still 13% above its lows from last Summer.
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