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June 28, 2018

Credit spreads in US and some thoughts on 200-day average

Credit spreads in US and some thoughts on 200-day average

The spread between US investment-grade debt securities rose to a 16-month high.

As a result of Friday, spreads between the yields of investment-grade bonds reached 1.22 percentage points, which is the highest level since the beginning of 2017.

 

 

Spreads between US investment grade bonds (pp)

In addition, bond rates posted the largest weekly increase in difference since February of this year. Recall that at the end of the winter of 2018, US market turned into sell-off, so increasing spreads is a worrying sign of mounting credit risk which generally make investors risk-averse.

Such a disturbing move can be caused by several factors. Firstly, within a week the placement of bonds for $43 billion took place, most of which accounted for Bayer and Walmart (31B). Secondly, the market continues to experience pressure because of the rising chances of unleashing “trade war” between the US and their partners.

On the other hand, everything is quiet in the “junk” bonds market, after the February jump spreads returned to January levels.

 

 

Spread between junk and government US bonds. Lower spreads means higher demand for junk bonds, i.e. investors are exhibit “risk-taking” mood.

While US stock markets have stabilized and moving in a narrow range, the spreads on investment grade bonds have been rising almost without interruption for nearly five months.

While the situation on the bond market can not be considered alarming, but it seems that investors prefer to shift their money out of riskier securities, however, which leads to an increase in the difference between the yields.

Will the spreads between junk and US government bonds increase, it can be a signal for a new correctional wave in the US markets. Investors may now preparing for this move.

Technical picture of some stocks markets also sends alarming signal to investors.

Corrections in financial markets of the world are gaining momentum – some of the largest equities posted noticeable tilt into the bearish area.

Correction movement on world exchanges was set by the United States, which erased 10-12% of stock market value from the beginning of this year. After that, the fall spilled over into other markets.

Among emerging economies most damage is observed in Brazil and Turkey. They have retreated by more than 20% from their February highs and are trading significantly below the 200-day average.

In addition, the German DAX 30 and Hong Kong’s Hang Seng have been trading below 200 days average for several days. And today, Dow Jones crossed through this important support line. Though it was only a “puncture”.

 

Technical picture for Dow Jones
 

For the US markets, the 200-day average is an extremely important technical level. It very often works as a support level, the penetration of which can lead to an additional correction by 10%.

At the same time, a slide below 200-day does not mean an automatic transition of the market into a “bearish” phase. In order to be able to talk about the beginning of a downward trend indices need to stay there for the quarter, a fall of more than 15%.

That is, its too early to say about the reversion of bullish rally, but this can be a serious shock for markets given that this is the third attempt this year by Dow Jones to break through the 200-day average. S&P 500 is slightly behind the benchmark, there is an average of 1.5% there. In my opinion, world markets are close to panic but try to look confident.

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