New WebsiteWhat does behind the curve look like? The Federal Reserve is about to tighten monetary policy, i.e., raise rates, while high yield spreads are above their historical mean. They have not done this at all going back to 2000 and have only done it twice since the 1970s (roughly 3% of all hikes).
High yield spreads are the difference in interest rates between high yield bonds and treasuries. This spread is used to assess credit markets, and when the spreads are moving higher it means there is more credit risk priced into credit markets. They can also be used as a gauge of economic activity as higher spreads are a great market-based indicator of a slowing economy. High yield spreads are at 5.5%, or high yield has a yield 5.5% higher than treasury yields, which is above the historic mean of 5.4%. The Federal Reserve is clearly about to hike rates into a slowing economy.
On the positive side: the Fed may not have to hike rates as much as expected. On the negative side: until then, recession is looking more likely, and equities have slightly more downside.
Sean Dillon, CMT, CFTe
SVP, Investment Strategies
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