With the US economy growing at a meager 1.6% pace, tighter financial conditions may be the last thing we need.
One area of the market that does a nice job of offering a leading indication of financial conditions is the high-yield bond market. Also known as junk bonds, high-yield bonds are ones issued to companies with speculative-grade credit ratings. These companies are at higher risk of default than investment-grade companies.
Junk-bond spreads have been elevated, signaling stress in that area of lending.
During a public webcast on Tuesday, DoubleLine Capital’s Jeffrey Gundlach observed that credit-rating downgrades were outpacing credit-rating upgrades.
Gundlach noted that, in the past, a tick below the blue line was “the beginning of something big.”
Now, while Gundlach wasn’t forecasting the market to tank, he did say that this was reason for caution from a monetary-policy standpoint.
Currently, the market is betting that the Federal Reserve will begin tightening monetary policy with an interest-rate hike in December. The risk is that the Fed ignites turmoil in the markets and is forced to loosen again.
As reported by Business Insider