SPX, Bond Yields and the Dollar
March 30, 2020
The ~13.5% bounce off last Monday’s closing low followed a narrowing in high yield credit spreads from ~885bps to last Friday’s closing level of ~620bps. Investment Grade corporate spreads also improved from ~158bps to ~112bps during the week. Both are a touch wider this morning on lower crude oil prices. High yield is dominated by Energy and will have a tough time narrowing much further without an uptick in WTI. But IG credit spreads are likely to continue to narrow as the Fed has included IG corporates in its latest liquidity facility. The trusted aphorism ‘don’t fight the Fed’ comes to mind. US equities are an indirect beneficiary of improvements in credit. A ceiling on IG credit spreads should loosely translate into a floor for equities. The narrowing of credit spreads was the final condition for last week’s bounce in the SPX. Other conditions were met in the two week run-up including: 1) recession-like valuations priced into markets; 2) investors underweight equities; 3) extreme bearish equity sentiment and; 4) extraordinary policy support. Again, the ‘all –clear’ to reenter risk assets will only follow a peak in US coronavirus case counts. Of course, markets won’t wait for that number and will gradually improve on anecdotal information and infection curve modeling.