The bond market is signaling that the economy is not going to enter a recession anytime soon, according to DataTrek.
That’s because corporate bond yield spreads relative to Treasuries are continuing to decline.
“The corporate bond market is not discounting any real possibility of a deep 2023-2024 earnings recession,” DataTrek said.
Underlying strength in the bond market is signaling that the US economy is not on the verge of entering a recession anytime soon, according to a Monday note from DataTrek Research.
In fact, corporate bond-yield spreads relative to US Treasuries suggest the economy is not going to enter a recession in 2023 or 2024, according to the note.
That would be a big surprise to most investors, as the prevailing wisdom has been that almost a year of high interest rates and elevated inflation meant the economy would enter a recession sometime in 2023.
But according to DataTrek co-founder Nicholas Colas, “the corporate bond market is not discounting any real possibility of a deep 2023-2024 earnings/economic recession.”
The spread between corporate bond yields and US Treasuries, which are considered safe assets, helps measure the risk appetite of bond investors.
They typically surge during risk-off environments that suggest economic pain ahead. In other words, investors want to be compensated more for taking on risk during periods of high uncertainty.
“When markets are uncertain about future cash flows, spreads increase to compensate investors for that risk. When markets grow more comfortable that earnings are stable or even increasing, spreads tend to decline,” Colas explained.
Over the past few months, the bond-yield spreads have been declining to levels that are below the average seen from 2015 to 2019, a period of relative calmness in the broader economy.
The current spread for corporate bonds relative to US Treasuries is 1.21 points, and for high-yield bonds relative to US Treasuries it’s 3.94 points. Meanwhile, the average for both spreads from 2015 to 2019 was 1.33 points and 4.56 points, respectively.
“That pre-pandemic 5-year period had its share of recession concerns but also saw long stretches of very low corporate bond spreads. Today’s spreads are just slightly below the 2015-2019 averages, which says the corporate debt markets is no more worried about a sudden decline in corporate earnings than it was in a period of relative financial and economic stability,” Colas said.
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