High Yield credit spreads1 are lower today than they were during market corrections in 2011 and 2016.
The same is true for Investment Grade credit spreads.
Why is this notable?
There were no recessions in 2011 or 2016 and today were are faced with what could be the largest economic contraction since the Great Depression.
During economic downturns, corporate defaults tends to rise, and investors typically require higher credit spreads to compensate for that additional risk.
So with the dramatic improvement in credit markets, are we to believe that the downturn is already over? Or are the markets instead displaying a distorted version of reality?
It’s a difficult question to answer in normal times, made harder by the growing influence on markets by outside forces.
The US Federal Reserve has purchased nearly $3 trillion in assets over the last 3 months, with its total balance sheet assets now totaling over $7 trillion.
For the first time, their purchases now include both investment grade and high yield bonds, with promises for these holdings to increase in the months ahead.
How much is the improvement in credit markets is due to the backstop implied by the Fed versus an improvement in the real economy?
This is a vital question for investors but it is impossible to know.
It’s never been more difficult to determine what is real.
Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For our full disclosures, click here.
