Split worries

The credit market continues to offer some warning signs, and unless things change, we might be close to a turning point. The chart below shows the avegare price of bonds that have split rating by agency, in the riskier frontiers of the credit spectrum. You can see that for BBB/BB and BB/B, there is still some stability, after the liberation day shock. But the B/CCC price difference has sinked below the April lows, which is an indication that investors are demanding more yield from the lowest part of the spectrum and that liquidity for those bonds may not be the greatest. Like it happened in April, it might be temporary, and might revert back, for instance if the Fed not only cuts rates in December but starts QE again. But if they are too slow to act or simply if inflation ends up being a bigger issue than anticipated, the public credit market can be the first shoe to drop, and it can have spillover effects on the private credit market.

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