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.