Taps Coogan – February 6th, 2023
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As the following chart from Bank of America via Joumanna Nasr Bercetche highlights, the yield spread between BBB investment grade corporate bonds and the 90-Day treasury bill is near the lowest levels on record.
Some of the prior examples of this spread nearing zero are quite ominous, including pre-crash 1929 and pre-GFC 2007.
There are a few different ways of interpreting the collapse in this spread but I’ll go with this: investors are writing-off corporate credit risk while simultaneously expecting rate cuts, leading them to buy corporate bonds to lock in slightly higher yields for longer. However, those two scenarios (rate cuts and a soft landing) seem somewhat exclusionary. In other words, this spread can be thought of as a proxy for investors expecting a recession while forgetting what that entails.
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