— Topdown Charts (@topdowncharts) April 21, 2020
• The Fed’s backstop helped bring down credit spreads – both investment grade and high yield
• Banks appear positioned to make it through the Corona Crash according to their CDS spreads
• Small US energy companies may need to lean on Federal Reserve support should oil stay low
Junk bonds, those rated BB or lower, surged earlier this month as the US Federal Reserve announced they would be buying high yield ETFs for the first time in history. The announcement came on April 9, less than three weeks following the equity market low on March 23. On the news, speculative grade bond ETFs rose sharply – HYG, JNK & USHY each gained more than 6%. Not surprsingly, the ETFs also experienced major inflows. HYG may be on pace for its biggest capital inflow month in years.
After the Federal Reserve announced their buy program, credit spreads narrowed considerably, but that was also the trend since the March low. The S&P 500 had already risen 23% and US high yield credit funds were up 13%. The S&P 500 has drifted higher since while junk bonds have consolidated their gains.
Nevertheless, there is still some concern among market participants in the bond space. Currently, the US Investment Grade Credit Spread, picture below, is about 2.3%. That is the same level as the peak in early 2016, a time in which US corporate earnings were particularly weak and recession fears were significant ahead of the presidential election.
These charts are from the latest Global Cross Asset Market Monitor.