Categories: Market Overview

This bond market signal indicates the bear market isn’t over yet

The price action of high-yield corporate bonds will signal to investors when the bear market triggered by the coronavirus pandemic is truly at its bottom, according to Longview Economics.

A bear market is a broad decline in a stock market, often defined as a price decline of 20% from a recent high. Sudden, sharp losses in stocks in early-to-mid-March took global stocks into bear market territory as the coronavirus pandemic spread worldwide and oil prices plummeted.

Stock markets have rallied in recent days, however, fueled by unprecedented monetary and fiscal stimulus from central banks and governments around the world, and the commencement of efforts to reopen economies following prolonged lockdowns. Markets have shrugged off dire economic indicators, such as the U.S. shedding a record 20.5 million jobs in April, suggesting that investors are beginning to see a case for a V-shaped recovery.

However, Longview economists believe this is too optimistic, in terms of the outlook for both earnings and GDP (gross domestic product). They expect the “current pandemic induced supply side shock to evolve into a demand side shock” in a more traditional recession.

Relief rally, not a bull market
In a note Monday, Longview argued that high-yield corporate bond spreads have signaled the end of every cyclical bear market since they started being recorded in 1997, often peaking before the equity bear market low.

Credit spreads are the difference between the yields on a particular corporate bond and a government bond. As a bear market nears its end, credit spreads narrow aggressively as the equity markets rally, Longview economists said. Within seven weeks of the end of the bear market that originated during the global financial crisis in 2008, spreads tightened by more than 10 percentage points, they flagged.

The behavior of spreads was similar in during the bear markets of 2002 and 2016, but the current muted price action of U.S. high-yield bonds rated CCC or lower is not signaling the start of a bull market, Longview economists argued. A CCC rating indicates a “junk” bond that is considered particularly high risk, and so is high yield.

The message, Longview economists hypothesized, is one of caution that bankruptcies are inevitable and policy is not yet sufficient to bring the bear market to a close. The current market action signals a relief rally, and not the start of a V-shaped recovery, they concluded.

This bond market signal indicates the bear market isn’t over yet, CNBC, May 11

The FxPro News Team

This team of professional journalists announces the most interesting and influential articles from the major financial media as a brief summary. All such news may have sufficient potential to affect the course of trading assets.

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