This article was written by Peter Tchir
As stocks continue to perform well, setting new highs on an almost daily basis, it has become noticeable that credit markets have stalled and are no longer rallying.
Here is a chart of high-yield bonds and investment-grade credit spreads since the election:
The pink line is the price of Barclays High-Yield Bond ETF (JNK) . The blue line is the spread on the CDX IG CDS index.
Shortly after the election, high-yield bond prices rose and credit spreads fell -- both signs of a healthy credit market.
These markets, much like equities, were range-bound from late December until late January, but as stocks have resumed their upward march, credit has failed to follow, and in some instances, credit spreads are a little weaker.
There are some reasons for credit to be weaker while equities rally:
- Total return on equities can be much higher, so as investors become less risk-averse they can pursue more aggressive strategies.
- The new-issue supply in the bond market has been large to start the year -- and many recent deals ranging from Estee Lauder (EL) to Citi (C) are trading wider than where they priced. Equities, via buybacks, continue to have supply pulled. (Citi is part of TheStreet's Action Alerts PLUS)
- Events like Macy's (M) highlight the divergence you can see in equities and credit spreads when a company becomes an M&A or LBO candidate -- it can be positive for equities and negative for credit (Macy's was certainly impacted that way).
- Europe more directly affects credit markets than equity markets -- at least at the early stages of any fear.
There are many rational explanations for why credit is recently lagging equities, so I am not overly concerned, but I think it is something investors should keep a close eye on because if credit leads the way, it is signaling that it might be time to leave the party.