Wednesday, June 30, 2010

No signs of acute distress in the bond market

The equity market may be awash in expectations of a double-dip recession, but the bond market is saying there are few if any signs of acute distress. Those two conditions (recession in the absence of acute distress) are not mutually exclusive, but they are rarely found together in the wild.

The evidence for the lack of acute distress can be found in these charts. The TED spread (top chart) is a little elevated, but not unusually so. In fact, at today's 36 bps it is actually lower than its 20-year average of 49 bps. (The TED spread is a good measure of the degree of fear, uncertainty and doubt which inhabits the interbank lending market, and it tends to rise when the market worries about problems that may lead to bank failures.) 3-mo. T-bill yields are the world's standard for risk-free investing, and the fact that yields recently have risen to their highest level in almost one year is a sign that investors' risk aversion has declined somewhat.

I can only speculate as to why all this should be happening, but at the very least it is reassuring to note these developments at a time when the equity market seems to have fallen prey to the predations of the bears. I would venture to say that the end of the world as we know it is NOT the most likely outcome.


John said...

It is interesting to note that the high yield bond market as represented by the two ETFs (HYG & JNK) are nowhere near the May lows. Now it might be that they soon revisit those levels but so far the level of fear in those markets is not as severe as in the equities. One would think the high yield bond market would be at least as susceptable to 'double dip' fears as equities, and arguably more so.

One other interesting aside:

The vix is down today even as the market continues to sell off. This decline is getting long in the tooth. A short term rally appears immenent.

Scott Grannis said...

Indeed, I think this selloff is quite overdone.