Thursday, August 27, 2015

High-Yield Bonds Spreads....A Canary in the Coal Mine????

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Interesting thought….I’ve always felt that the bond market is the ‘canary in the coal mine’ when it comes to warning about upcoming trouble in equities.

Take a look at the first chart below at where the CRB (commodity index) is now vs the past 10yrs……@ lows!!!  Lots of that is energy and industrial commodities falling off the cliff, very heavily influenced by China’s slowdown.  Lots of high yield bond debt is from companies in those spaces.   For obvious reasons, with all the tumult in the energy sector,  those bonds have been marked down, widening spreads.  Take a look in the second chart below at the yield spread widening in high yield bonds that started in earnest back in June.  While high-yield spread widening isn’t always a direct correlation to equities (inverse), it does, very often, precede equity market routs.  This time, it does seem to have sounded an alarm!!
Time to buy stocks and high-yield bonds?
Is the worst over?
Well, with expectations of dovish Fed comments likely to come out of Jackson Hole starting today, possibly….given that there’s enough carnage at the moment to start some cherry picking….but…..
After that?????
Stay tuned…..

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