Veteran Trader: ‘Credit Spreads Are All That Matter’

Read more from The Macro Tourist


There are lots of theories as to why the stock market is selling off so hard. I have my views, but to a large extent, opinions don’t mean much in this environment. It’s like when your grandma tells you she was once quite a dish. Sure, it might be true, but it’s not doing much for anyone today.

I just want to point out the action in 10-year high-yield spreads. This is the rate that high-yield bonds are yielding above government treasuries.


To me, credit spreads are all that matter. Stocks are simply backing up in sympathy with the widening of credit spreads.

According to Bloomberg, yesterday was the biggest one day expansion in high-yield credit spreads since August 2011. That’s not good and it’s no wonder stocks are struggling.

Yet, amidst all of this doomsday talk, it’s instructive to step back and look at the bigger picture.

Have we been here before? And what was the outcome back then?

Well, the past 3-month widening has been a touch more quick, but the move resembles 2014 to a surprising degree.


In 2014 the 10-year Barcap high-yield spread widened from 250 basis points all the way to 525 basis points in mid December. Interestingly, the high of the credit spread corresponded with the FOMC meeting – December 17th.

During the past three months, the credit spread has moved a similar amount to the 2014 episode. The only difference is that this December 19th FOMC meeting didn’t prove the high, but instead only encouraged more selling of credit.

Will it get worse from here? Will traders continue selling everything in a desperate attempt to get risk off the sheets for year end?

Or have we reached that ‘obscene point’ where it makes sense to take out some blue tickets?

Regardless of your view, keep your eye on credit spreads. It will be difficult for stocks to rally without this spread tightening back to more reasonable levels. At the very least we need the selling in credit to stop and for spreads to stabilize.

Yet if 2018 looks anything like 2014, we very well could have reached that point yesterday.

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3 thoughts on “Veteran Trader: ‘Credit Spreads Are All That Matter’

  1. Thanks for the article H.

    See Moody’s report
    “Medium-Grade’s Worry Differs from High-Yield’s Complacency”

    This may be a case of HY spreads playing catch up relative to historical correlations between the HY and BBB credit spreads (correlation which are normally very high at around 0.92 to 0.93, but have recently decoupled)

    This could be a reflection of the bond markets telling us that 2019 earnings and profitability prospects are turning more negative based on global economic data.

    As far as I can tell BBB (Baa) spreads remain swollen, but need to verify.
    We should be able to approximate how far HY spreads will swell up based on this tight historical correlation, all else being constant.

    From the citation above

    “The investment-grade bond market appears more anxious about the future than the high-yield bond market. A now well above-trend Baa industrial company bond yield spread warns of a wider high-yield bond spread. To the contrary, a trend-like high-yield spread favors a thinner Baa spread. In all likelihood, if the still positive outlook for profits holds, the high-yield bond spread will prove to be more prescient than the now swollen Baa spread.
    Moody’s recent long-term Baa industrial company bond yield spread of 220 basis points was well above its 174 bp median since late 1987. More specifically, the long-term Baa industrial spread’s December-to- date average of 221 bp was wider than 81% of its month-long averages since October 1987.
    The historical correlation between the long-term Baa industrial company bond yield spread and a composite high-yield bond spread is a very strong 0.92. When the Baa industrial spread was previously between 210 bp and 230 bp, the high-yield bond spread averaged 669 bp, which was much wider than its recent 469 bp.
    Unlike the relatively wide Baa industrial spread, the latest high-yield bond spread matches its long-term median of 469 bp. The record shows that when the high-yield spread’s month-long average was between 450 bp and 480 bp, the long-term Baa industrial spread averaged 165 bp.”

  2. Can someone please tell my what a ‘blue ticket’ is? I know what it means here in Alaska as an undesirable that got eighty-sixed back in the day but Giggle is no help re bonds, let alone a ‘pink ticket’ as Muir uses both, always.

  3. I think it’s a phrase from the older days of trading, when buy orders were issued on blue paper slips and sell orders on pink ones.

    It sort of resounds sometimes in the graphic layout of some trading software, pls. see here for an arbitrary example:

    Anyone please correct me if I’m wrong.

    Disclaimer: I’m in no way affiliated with the site linked above (don’t even know what their Software does, exactly), it was just on top of my Google hits which made some sense in this context 🙂

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