After last week’s surprisingly weak U.S. employment numbers from the Labor Department, measures of corporate credit risk have spiked. According to Bloomberg: “Investors are now demanding more than they have in three years to own junk bonds, which are on track to cap off their worst week this year.” For example, rising credit spreads in the junk bond market was shown last week to be at a level consistent with 4 crises of the past ~20 years.
Credit-default swaps of investment-grade companies have also noticeably increased, according to Bloomberg, indicating that the rise in corporate credit risk is not just limited to junk bonds. If you click on the first graph from the Federal Reserve Bank of St. Louis, then you will see that the average credit spread of A-rated bonds have been on the rise in the past 15 months to its current level of 1.37% (yellow line).
Is this level high? It depends how you look at the data. Going back to when the data begins in 1996, then you will see that credit spreads for A-rated bonds previously increased to this current level in:
1) April 2000, which was the end of the Tech Bubble, given the S&P 500 peaked only one month earlier before crashing months later,
2) October 2007, which is arguably the beginning of the Subprime Mortgage Crisis given that was the same month the S&P 500 peaked before crashing months later, and
3) May 2011, which was the same month the S&P 500 peaked before the European Debt Crisis became really evident only three months later when markets around the world crashed.
As you can see, credit spreads of some of the highest quality corporate balance sheets have risen to an ominous level. If credit spreads rise much further, then it could prove to be the beginning of another financial event. Please consult an investment fiduciary before making any investment decisions.