From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The Federal Reserve is doing its best to prepare the market for what is expected to be a year of rate hikes. But investors aren’t exactly enthusiastic about this outlook, as stocks came under further pressure following Wednesday’s Federal Open Market Committee announcement.
The bond market is also offering some valuable information again. And considering the recent volatility, it’s more important than ever to listen closely.
When we think about bonds, credit spreads are always top of mind, as they’re a great barometer of market health. When there’s stress on risk assets, it shows up in credit spreads.
When analyzing credit spreads, all we’re doing is measuring the difference in yield between a Treasury (the safest bet) and a corporate bond (riskier asset) of the same maturity. If these spreads begin to widen, it’s usually problematic for equities.
We can also study these relationships by comparing the bond prices themselves, instead of their yields. One of our favorite ways to do this is by charting the High-Yield Bond ETF $HYG relative to the Treasury Bond ETF $IEI.
We’ll dive into this ratio in today’s post and discuss where it’s likely headed from here, and more importantly, what it all means for risk assets.