09 April 2019
Low credit spreads for low-quality companies should signal all is hunky-dory in the economy because they signal very low levels of risk for companies with poor quality balance sheets. And yet, the entire world is making a gigantic fuss of the inverted government bond yield curve. The inversion is for most a clear signal we’re likely heading for a recession or a serious growth slowdown. Quod non?
The credit spreads are telling another story. Still, look at some data and it is mixed at best. German factory orders for February fell at their fastest pace since the financial crisis. But, forwardlooking PMI data have improved somewhat globally.
Of course, there is the story of liquidity. Trillions of dollars are sloshing around the globe in search of yield. With yields this low, thanks to central banks, investors seem willing to take a punt at high yield. Yet, in the past, the spreads also tend tob drop to extremely low levels prior to most recessions. They spike again as growth nosedives and the central banks cut rates leading to a steepening of the yield curve.
Whatever you may think of the current credit spreads, they seem to offer very little value to me. Add the fact that in the investment grade arena, the percentage of BBB-rated bonds has largely increased, the odds for a slew of bonds falling into the junk bond category only makes matters worse. Time to hit the exit for risky credits.