Bond markets have made some dramatic moves over the last few weeks and I thought it an opportune time to review. Credit spreads have narrowed considerably over the last few weeks as risk takers have re-entered the markets. High yield, IG corporates and emerging market bonds have all enjoyed significant rallies. It is our judgement though that – for now – the previous trends remain intact.
The HY spread is now under 7%, a very big move over the last month. But as you can see, this type of move after a widening isn’t unusual even in the face of recession. Indeed, there was a similar narrowing even after the official start of the last recession. Now, I’m not looking for anything like what happened in 2008 but if we are headed for recession spreads in the 10% range would seem a reasonable target.
The High Yield ETF has had a nice run:
But long term momentum still favors Treasuries:
Emerging market bonds have also enjoyed a big rally
But again, long term momentum still favors Treasuries:
Investment grade corporates have also rallied in this risk on phase:
But again, long term momentum continues to favor Treasuries:
Short term Treasuries have outperformed longer term for the last few weeks but the long term trend is still intact with duration outperforming:
Yes, it is possible that a double top is in the making, that long term bonds are peaking relative to short term. Long term momentum is still positive but barely. And frankly this is something I’ve been wondering about for a while now. If commodities are going to make a comeback – if gold is once again acting as a leading indicator for that space – then at some point, bonds are going to have to take a hit. Inflation is the bond market’s kryptonite and it generally hits long term bonds harder than short term. That’s just one possibility though. It could also be that short term bonds outperform long term – the yield curve steepens – as we enter recession. That is actually what we should expect if history is any guide. Short rates collapse faster than long rates as the Fed eases:
