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Assessing Credit Spreads

October 15, 2024

When I think about bonds, credit spreads are always at the top of my mind because they provide an excellent gauge of market health.

We simply measure the yield difference between a Treasury bond and a High-yield bond with the same maturity.

Another way to do it is by looking at the prices of the High-Yield Bond ETF $HYG compared to the Treasury Bond ETF $IEI:

When bond market investors are confident and willing to take on more risk, they drive up the value of High-yield bonds, causing this ratio to increase or credit spreads to narrow.

Conversely, when investors seek safety, credit spreads widen, which doesn't not bode well for risk assets.

As you can see in the chart, this ratio is pushing up against its highest level of the year.

This action suggests that there's no systemic risk upon us.

As long as that remains true, we can feel comfortable that equities and risk assets, in general, will stay in good shape.

Hope you enjoyed this post!

Alfonso

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