Bond Spreads

A signal from the bond market.…
Spreads in both investment grade and riskier high-yield bonds have narrowed rapidly over the last three weeks. Analysts at Bespoke Investment Group studied the history of such spread compression, though it isn’t a long series since the popular credit-default swap indexes were only invented this century…

In the nine previous times when the CDX HY spreads fell at least 75 basis points in three weeks, the S&P 500 rose over the next week, six months, and year, with 22% average returns over the next year. “It’s awfully hard to come up with a market signal that looks much better than that long-term,” said the Bespoke analysts.

On investment-grade bonds, it is less strong but still positive. When the CDX IG spread has fallen at least 15 basis points over three weeks, and that has happened 14 times since 2005, the S&P 500 rose in a year’s time in 12 of those occasions, with an average gain of 13%.



St. Louis FED Graph of those HY spreads