Why The Junk Bond Chart Points To A Looming Economic Slowdown

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A Wall Street veteran is going against the market consensus by sharpening his economic slowdown call.
The Economic Cycle Research Institute’s Lakshman Achuthan is citing troublesome activity brewing in the quality spread between junk bonds and corporate debt. It’s suggesting default risks are rising — an ominous signal for the stock market.
Achuthan’s charts show the difference between junk bond yields and the rate on quality-rated corporate debt. He then inverts that chart so it gives a clear picture of what’s to come: When the junk-quality spread widens, the line points down, warning of greater economic risk ahead.

“It’s been widening since spring,” he said Monday on CNBC’s “Trading Nation.” “It’s accelerated a little bit here.”

Achuthan, a business cycle expert and the institute’s chief operations officer, has been attacking Wall Street for being too optimistic about 2018. He’s been warning corporate clients and fund managers that it could cause another downdraft in an easily spooked market.
“That’s showing a signal from a very liquid, very smart bond market keying off of some concern about relatively higher default risk as the economy slows. This happens every time we have a slowdown, and it’s corroborating what we picked up in our leading indexes,” he added.
Achuthan believes the downturn could last a couple of quarters and affect U.S. and global markets. He says it could materialize before the second half the year begins.
“It’ll be alarming I think in the sense that it’s the opposite direction that everybody is expecting,” Achuthan said. “On this chart, each of those troughs, those are the bottoms and the slowdowns. We’ve had three slowdowns since the recession.”
HYG, weekly timeframe, liquidation in the process…


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