Asleep At The Wheel: “Clients Are Asking If Our Models Are Updating Properly”

So one of the most eerie things to note about credit markets of late is the tight trading range.

As I highlighted on Saturday, the fact that credit hasn’t responded (i.e. spreads haven’t meaningfully compressed further) as stocks rally suggests that the cycle may be starting to turn and as we’ve seen, credit anticipates bad sh*t (to put it colloquially) before equities:

credit

(Morgan Stanley)

So those charts show you how credit spreads began to blow out ahead of sharp declines in stocks. Here’s what amounts to a current version of the above:

stockscredit

(SocGen)

As SocGen wrote earlier this week, the “‘treading water’ spread action for the credit market is in pretty sharp contrast to an equity market that has been rallying to new all time high.”

Indeed.

To get an idea of what SocGen means by “treading water,” have a look at the following rather striking chart from Barclays:

treadingwater

Want to know just how eerie this calm truly is? Look no further than this hilarious commentary, again from Barclays:

The paragon of stability is the US Corporate index, which has not had a one-week move greater than 3bp since late 2016 (Figure 2). Investment grade bonds have been so steady that we have started to field questions from clients about whether our publications are updating correctly.

Assuming this “asleep at the wheel” dynamic can’t persist for much longer, spreads have to either compress further or blow out. Which do you think is more likely given the already impressive rally off last February’s deflationary doldrums and rising political risk?

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