Macro Wrap – Who Deserves the Credit?

by Enis March 26, 2014 7:58 am • Commentary

Credit spreads have not moved much for most of the past year.  Credit defaults in the U.S. have been quite rare, and low rates has allowed corporates to roll their funding needs further and further out in maturity.

Interestingly, as the debate about financial stability has heated up at the Federal Reserve over the past 6 months, credit spreads seem to be the preferred way to assess whether financial markets are complacent or not.  Here was a good article detailing new Governor Jeremy Stein’s views, by Miles Kimball in Quartz on Monday:

Governor Stein, after making the case that financial stability concerns should play at least some role in monetary policy-making, however small, makes an excellent suggestion of how to guess when financial excess is a concern. He suggests focusing on the size of risk premiums in the bond market. If people are willing to pay almost as much—or equivalently, willing to accept interest rates almost as low—for junk bonds as they are for the very safest bonds (still US Treasuries, despite all of our government debt follies), that is the time to worry.

Looking at current credit spreads in the U.S. markets, here’s a look at the 5 year investment grade CDS index over the past year:

CDX 5 year investment grade index, Courtesy of Bloomberg
CDX 5 year investment grade index, Courtesy of Bloomberg

Investment Grade credit spreads bottomed in late December, and have moved higher in March even as stocks have remained resilient.  In the big picture, these are small moves, but notable given the Fed’s focus on the credit market.

The credit markets have moved wider after last week’s FOMC meeting even as stocks have recovered their losses.  Whether that divergence persists could be telling about the market’s assessment of future Fed policy, as well as the varying impact of higher rates on stocks and bonds.