The market is almost not asking for an extra prize to the risk of lending a company instead of lending the US government. How do you explain?
Let’s start at the beginning: What is the credit spred?
This Spread measures the difference in performance between a US Treasury bonus (risk -free active) and a corporate bonus (active with greater risk).
If the spred is high, it means that investors demand a lot of cousin for taking corporate risk. This usually happens in times of crisis. And if it is low, it indicates extreme confidence, that is, the market believes that the risk is minimal.
Today we are in that second scenario. The differential between what yields a treasure bonus and a corporate bonus in the US is at 0.73%, the lowest level since 1998. And when there is so much peace of mind, many times you have to get more alert.
The chart leaves it very clear: peaks like 2008 (6.18%) or that of the pandemic disappeared, and today the Spread is on historical floors. That is, a total complacency.
And the context?
All this happens at a time when the Fed has already started the low rate cycle. Powell reduced 25 basic points this week and left the door open to more cuts, but with a cautious tone: he spoke of weakness in employment and inflationary risks.
The result is that the prize for taking corporate risk practically disappears.
So?
The conclusion remains the same: today the market pays you very little to assume a risk that never ceases to exist. Just 73 extra basic points for lending a company instead of lending to the US Treasury.
With the US record deficit, elections in the horizon and increasing doubts about the economy, trusting that “nothing happens” can be dangerous.
Not for nothing gold is having its best year since 1979. Without a doubt, mandatory position in any portfolio a long time ago.
Gold
But for a fixed income investor in the US, the question is concrete: Is it worth taking corporate risk when the prize is so small? Today it seems that no, at least with an important position.
If you are interested in continuing to deepen, see analysis, videos and exclusive content, I leave you here all together so that you choose what serves you: Club of Investors – Spreads.
Note: The material contained in this note should not be interpreted under any point of view as an investment council or recommendation for the purchase or sale of a particular asset. This content has only educational ends and represents only an opinion of the author. In all cases it is advisable to advise with a professional before investing.
Source: Ambito
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