From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
When it comes to the bond market, credit spreads are always top of mind. They provide critical information regarding the liquidity and stress of the largest markets in the world.
While most of us aren’t full-time bond traders, in many cases we turn to these assets to offset the risk associated with the equity side of our portfolios. That’s fine.
But when credit markets come under stress, it affects all asset classes, especially equities. We’re seeing this now.
Earlier in the month, we noted that these crucial spreads were widening to their highest level since late 2020 as the high-yield bond versus Treasury ratio $HYG/$IEI hit new 52-week lows.
It’s no coincidence that the major stock market averages fell to their lowest level in over a year as this was happening.
This is why we pay close attention to credit spreads. They give us information about the health of other risk assets.
Right now, with HYG catching higher on both absolute and relative terms, they’re telling us we could be in for a relief rally.
Let’s hone in on the recent action in high-yield debt and discuss what this means for stocks in the near term.