If you’re looking for market signals about recession risk in the aftermath of Silicon Valley Bank’s collapse, look no further than the high-yield bond market.
If you’re looking for market signals about recession risk in the aftermath ofthat sprang into the open this month has raised concerns that the flow of credit from regional banks into the economy could slow. Such a slowdown could pinch the economy, or even help tip it into a recession.
Concerns like this tend to be most visible in the high-yield bond market, since that’s where companies with the lowest credit ratings — and who are the most vulnerable in a recession — borrow money.High-yield bonds' spread over Treasuries — a measure of how much investors are being paid to lend to high-yield companies, compared to lending to the U.S. government — have shot up by an eye-popping 1.22 percentage points in the last two weeks alone.
Treasury yields themselves have actually gone down over this period — amid an overall flight to quality — while high-yield bonds headed in the opposite direction. That means investor perceptions of actual credit risk, not just interest-rate risk, have grown dramatically.Spreads crossed the 5-point mark last week — traditionally something of a red line indicating higher-than-average risk in the market.The market is telling us that "the risk of recession in the second half of the year has intensified," says Ken Monaghan, co-director of high yield at Amundi US.
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