Five Things to Watch for Signs of Market Trouble
Gauges on corporate debt, futures and 30-year Treasurys flash warning signs, reflecting concern over U.S. tariff policy
By Matt Wirz, Alexander Osipovich and Gunjan Banerji, The Wall Street Journal, April 13, 2025
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In volatile moments like this one, investors look for signs of borrowers under duress, forced selling and illiquidity. Those gauges offer clues on where the markets are headed, and how the selloff is beginning to ripple through the economy. …
A 30-year bond selloff. [The entire yield curve rose last week. – W]
Junk-bond insurance: There has been a rush to protect against bigger declines in high-yield bonds. Put-options trading tied to one of the biggest exchange-traded funds tracking high-yield bonds, the iShares iBoxx $ High Yield Corporate Bond ETF, has surged to the highest level on record in recent sessions, Cboe Global Markets data shows…[The yield spreads of junk bonds show the same thing. – W]
By one measure, debt markets are nearing capitulation, the point at which selling pushes prices down—and triggers more selling. This feedback loop becomes hard to stop…
Loan fund exodus: Investment flows into ETFs that buy corporate loans, a top seller in recent years as interest rates rose, have reversed. Investors pulled $1.3 billion out of loan ETFs on April 4, the biggest daily outflow on record…
A chill in futures: Market liquidity, or how efficiently investors can buy or sell an asset at a good price, has thinned out in CME Group’s 10-year Treasury and E-mini S&P 500 futures…That could be a sign of trouble ahead. Traders use futures for a variety of purposes, including hedging against market shocks. When firms retreat from quoting futures prices—as they often do during bouts of volatility—it makes the market more brittle and vulnerable to the next shock. [end quote]
Bear markets can decline smoothly. Or there can be a sudden panic which causes a feedback loop as investors are forced to sell good assets to cover leverage on losing assets. Capitulation is a buying opportunity.
Market liquidity is not the same as liquidity in the financial system as a whole. Financial stress happens when there isn’t enough liquidity for banks and brokerages to pay current debts even if they are solvent (they have enough illiquid assets to cover their debts but not cash).
Cash flow is king.
The Federal Reserve won’t step in to stop a market panic as long as liquidity is sufficient. They will step in if financial stress rises in order to stop spreading failures.
Wendy