Mar 21, 2023 - Economy

High-yield bond spreads show increasing recession jitters

Data: ICE BofA U.S. High Yield Index via ICE Data Services; Chart: Axios Visuals

If you’re looking for market signals about recession risk in the aftermath of Silicon Valley Bank’s collapse, look no further than the high-yield bond market.

Why it matters: The simmering banking crisis that sprang into the open this month has raised concerns that the flow of credit from regional banks into the economy could slow. Such a slowdown could pinch the economy, or even help tip it into a recession.

  • Concerns like this tend to be most visible in the high-yield bond market, since that’s where companies with the lowest credit ratings — and who are the most vulnerable in a recession — borrow money.

What happened: High-yield bonds' spread over Treasuries — a measure of how much investors are being paid to lend to high-yield companies, compared to lending to the U.S. government — have shot up by an eye-popping 1.22 percentage points in the last two weeks alone.

  • Treasury yields themselves have actually gone down over this period — amid an overall flight to quality — while high-yield bonds headed in the opposite direction.
  • That means investor perceptions of actual credit risk, not just interest-rate risk, have grown dramatically.

The kicker: Spreads crossed the 5-point mark last week — traditionally something of a red line indicating higher-than-average risk in the market.

  • What they're saying: The market is telling us that "the risk of recession in the second half of the year has intensified," says Ken Monaghan, co-director of high yield at Amundi US.
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