• 764 days Will The ECB Continue To Hike Rates?
  • 765 days Forbes: Aramco Remains Largest Company In The Middle East
  • 766 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 1,166 days Could Crypto Overtake Traditional Investment?
  • 1,171 days Americans Still Quitting Jobs At Record Pace
  • 1,173 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 1,176 days Is The Dollar Too Strong?
  • 1,176 days Big Tech Disappoints Investors on Earnings Calls
  • 1,177 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 1,179 days China Is Quietly Trying To Distance Itself From Russia
  • 1,179 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 1,183 days Crypto Investors Won Big In 2021
  • 1,183 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 1,184 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 1,186 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 1,187 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 1,190 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 1,191 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 1,191 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 1,193 days Are NFTs About To Take Over Gaming?
  1. Home
  2. Markets
  3. Other

How Deleveraging Looks

I found an interesting pattern in studying corporate debt. Specifically yield spreads which is the difference between investment grade and below investment grade yield. As investors grow risk averse they prefer to move to the safety of investment grade debt thus driving yields lower. They do this buy selling below investment grade debt thus driving yields higher. The result are higher spreads.

So in theory if you compare credit spreads to equity prices the two should have an inverse correlation and the multi year chart below shows that to be true. As equity rallied over the past eight weeks notice how spreads have actually remained flat. If investor risk aversion was diminishing as equity implies you would expect spreads to fall. Especially over that long of a timeframe. But they have not.

The last time a similar event happened was May 2008 as the previous "great deleveraging" was underway. This is just another example of the ongoing war between credit and equity.

Aaa/Baa Corporate Bond Spreads versus SPX

 

Back to homepage

Leave a comment

Leave a comment