Treasury yield curve and high yield bonds spreads
Source: Federal Reserve Bank of St. Louis, as of March 16, 2022. 2-10 yield curve refers to the 10-year Treasury yield less the 2-year Treasury yield. High yield spread refers to the yield on the ICE BofA U.S. High Yield Index less the risk-free rate. Long-term average refers to the average spread from January 1997–March 2022.
- Equity and core fixed income markets reacted very differently this week in the face of several high-profile market drivers, including a Fed rate hike, Russian-Ukrainian negotiations and Chinese authorities voicing support for domestic markets. In all, the S&P 500 rose just under 5% while the Agg declined further as bond traders steel themselves for a potential economic slowdown.1
- The week’s activity has been a microcosm of 2022 as investors have been forced to digest multiple, often competing market drivers. These include healthy U.S. consumer and corporate balance sheets and a strong job market against multi-decade high inflation, the war in Ukraine and tightening monetary policy.
- Against this backdrop, the spread between long- and short-term Treasury yields (2–10 yield curve) has flattened significantly over the last year, a sign of tightening monetary conditions and, if inverted, historically a precursor to recession.1 Meanwhile, high yield bond spreads have risen this year but remain far below their long-term average and do not yet appear to signal significant economic or corporate stress.
- No one knows the path of economic growth. Yet it seems fair to say that investors are operating in a significantly more uncertain environment than even in late 2021. Given today’s potential inflection point, investors may be wise to adopt an active approach to navigate quickly changing markets and seek alternative ways to generate returns and manage risk.