Morning Notes — Bond Yields and Trough Valuation

Credit spreads: The CDX Investment Grade credit spread narrows another ~10bps to ~107. The spread was in the 40-50bps range before dislocation and reached a wide of ~154bps on March 20. The CDX High Yield credit spread is down ~28bps to ~672bps. This was in the ~300bps range prior to freezing up and reached a March 23 high of ~861bps. Higher crude prices will help narrow HY spreads further.

Chartist: Yesterday, the S&P 500 closed at 2663, which is at the high end of our 2650-2665 resistance area. The SPX is trading through that range at the moment, but the close matters more to market technicians. Sector leadership is also important and it’s encouraging to see the most cyclical groups out in front for a second straight session. Again, you probably need higher bond yields to sustain cyclical sector leadership/make a case for a V-shaped recovery in equities. Will rising expectations of a fourth fiscal package cause bond yields to rise? Maybe in the short-term, but the Treasury’s inevitable debt issuance to pay for the stimulus will probably just be bought by the Fed. There will be a potential for intra-month spikes due to possible timing mismatches, but the Fed has really only one task at the moment, which is to keep bond yields at/near historic lows