High Yield Spreads Surpass 2011 and 2016 Peak Levels
The daily price swings of the Dow tend to get most of the financial pundits' attention, but it's the bond market that you should be paying attention to.
I've talked about the risks in the corporate credit market for some time and now some of those risks are coming to fruition. We're starting to see big name issues getting downgraded (Boeing got cut to BBB at S&P while Occidental Petroleum was downgraded to junk) and the worst could be yet to come.
High yield bond spreads have climbed from as low as 3.4% in January to nearly 10% today.
High yield spreads rose to around 22% during the peak of the financial crisis and the steep rise in spreads over the past couple weeks could lead to a move towards similar levels.
The Fed, for its part, is doing what it can to save the corporate bond market. The ECB has already committed to adding corporate debt to its balance sheet. The Fed has reopened a number of credit facilities targeted at buying commercial paper and other corporate debt instruments.
Will the Fed's actions work? The flood of Fed buying did manage to help pull the economy out of the financial crisis, but it's so far been unable (or unwilling depending on your point of view) to work those assets back off the books.
It appears that the Fed balance sheet is going to head towards $10 trillion soon.
My impression is that high yield spreads are going to continue heading much higher from here. An increase to financial crisis levels is certainly in play, but I'd say that chances are less than 50/50 at this point. Of course, this crisis has escalated rapidly, so we may look back on this in a couple of weeks and laugh at how overly optimistic it sounded.
The corporate bond market, both investment-grade and junk, earns a strong "avoid" rating. Even short-term corporate investment-grade debt, which I've advocated for before, is looking more and more like an area you want to stay away from as well.
T-bills and floating rate Treasuries look like the safest places for cash at the moment.
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