High Yield Credit Spreads Are Crucial Now
The Widening Has Finally Begun
The combination of a higher than expected reading on inflation, continued unrest in the Middle East and new sanctions on Russian oil created a general risk-off sentiment that sent utilities, long-term Treasuries and gold prices to gains of 3-5%. Even though the S&P 500 gained about 0.5% on the week, suggesting that risk asset buyers are still out there, the fact that small-caps lagged large-caps by more than 2% isn’t consistent with a market that’s ready to make another big move higher.
I think we really need to watch high yield credit spreads very closely here because that’s the one number that will give us a good indicator of overall risk appetite. Over a two-week period from September 20th to October 5th, spreads got wider by more than 60 basis points, easily the biggest and sharpest move higher since Silicon Valley Bank collapsed. While that mini-blowout in spreads was due to a tail risk event, this one looks to be driven more by macro factors and deteriorating consumer sentiment. The UofM number badly missed expectations for October and fell to a 5-month low with declining conviction in personal finance conditions driving the change. This is consistent with my belief that the consumer is getting tapped out and is likely to be the factor that tips the economic scales in the other direction. Next week’s retail sales report will be important.
Keep reading with a 7-day free trial
Subscribe to The Lead-Lag Report to keep reading this post and get 7 days of free access to the full post archives.