Credit Market Signals "Risk-Off"
One chart illustrates the paradigm shift in risk assessment since the start of November. See the weekly GoNoGo Trend chart of option-adjusted corporate bond credit spreads which have now completely reversed trend conditions since Nov 1st, 2021 – from purple & pink “NoGo” bars through amber neutral and now the strongest blue “Go” bars as GoNoGo Oscillator broke out of a max squeeze to reach overbought extremes and consolidating gains.
Credit spreads indicate the credit risk perceived by market participants/investors and are dynamic reflecting real-time market conditions, unlike credit ratings which are revised with some lag. They reflect the risk premia that investors apply to the debt of the issuer, relative to government debt. Or more precisely, the difference in yield between any debt security and the relevant government benchmark of the same maturity. Credit spreads often widen during times of financial stress wherein the flight-to-safety occurs towards safe-haven assets such as U.S. treasuries and other government securities.
Throughout 2021, credit spreads have remained at historic lows and remained within the tightest decile of the past 25 years. Credit spreads have clearly bottomed and are now rising. This measure of investor's risk tolerance will have negative implications for highly valued growth equities and we could see headwinds for tech, discretionary, and communications sectors as well as weak relative performance for indexes like the Nasdaq vs DJIA.
Credit spreads indicate the credit risk perceived by market participants/investors and are dynamic reflecting real-time market conditions, unlike credit ratings which are revised with some lag. They reflect the risk premia that investors apply to the debt of the issuer, relative to government debt. Or more precisely, the difference in yield between any debt security and the relevant government benchmark of the same maturity. Credit spreads often widen during times of financial stress wherein the flight-to-safety occurs towards safe-haven assets such as U.S. treasuries and other government securities.
Throughout 2021, credit spreads have remained at historic lows and remained within the tightest decile of the past 25 years. Credit spreads have clearly bottomed and are now rising. This measure of investor's risk tolerance will have negative implications for highly valued growth equities and we could see headwinds for tech, discretionary, and communications sectors as well as weak relative performance for indexes like the Nasdaq vs DJIA.