High yield credit spreads widening

Although equities quick to rebound

Chart of the Day

Equity markets were quick to rebound yesterday, with high-beta small cap stocks doing especially well. There were still signs of nerves, though, as the spread between high-yield and investment-grade corporate bond yields held at a relatively high level, of 229 bp, up by 30 bp in the past month. This isn’t too much to worry about for now, especially as the spread has widened partly because investment grade bond yields have followed government bond yields lower, but it is still something to watch in the coming weeks.

Macro

US housing starts rose to 1,643,000 annualized in June, which was better than expected, but building permits decreased to 1,598,000 which suggests starts could decline in July.

Japanese exports have rebounded far more quickly than after the GFC.

Markets

Equity markets generally rebounded yesterday, especially in the late North American session.

Yields rebounded much more modestly.

Across the major advanced economies, 30y-5y yield curves are now closer to each other.

The US 10-year TIPS yield has moved 9 bp lower in the past week, with the breakeven inflation component moving 11 bp lower, so both components have contributed similarly to the drop in the 10-year yield.

The Russell 2000 rebounded by more than the S&P yesterday, but it has lost much more ground to large caps than small caps have done elsewhere in the world.

The put/call ratio has already come back down.

Will gold do better if real yields remain low? - Some suggest the stronger dollar is holding back the metal.

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