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I began seeing some very wild intraday moves, with junk debt prices collapsing (yields spiking) while safer Treasuries were aggressively being bid up (yields dropping).The speed and magnitude of this credit spread widening on Wednesday was indeed meaningful. Thursday, that spread widened even further, in a way that suggests that a credit event may be underway in the U.S. and that contagion is here.
Here we are, 48 hours after the major movement began on Wednesday, and a look at the daily chart of junk debt and sovereign debt EMB -0.09% shows that a "crash" may actually be here in credit markets. I say "crash" in quotes because while the price decline may not seem like much, a crash should be defined by how far back in time an investment sends you in its decline relative to a short time frame.
Meanwhile, Treasuries have spiked, with 30-year Treasuries below the panic 3% level. To say that "credit leads the stock market" is too simplistic. It is widening credit spreads which lead risk-aversion, and vice versa. Credit spreads lead equities, not credit.
In the past 48 hours, the magnitude of the decline of junk debt and sovereign debt relative to Treasuries increasing suggests meaningful credit stress is occurring. If junk/sovereign debt doesn’t stabilize and improve shortly, the odds of a follow-through sudden break in stocks in the U.S. increase substantially.
Credit spread movement and improvement/deterioration is pretty much THE thing to focus on.
The move in debt spreads over the last 48 hours has increased the odds of something major to come.
Notice that this isn’t a prediction, but a statement about how such a scenario could occur if indeed junk debt deteriorates further beyond the last 48 hours, and under the assumption that the magnitude of a decline could lead equities lower.
The most important question in the world may end up being answered soon after all. I remain defensively positioned in bonds and still short the US and European stock markets with an emphasis on short financials. All positions held since March 14.
http://www.jsmineset.com/
Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth.
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