The Importance Of The Decline In Corporate Bond Yields

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Includes: ACP, AIF, ANGL, ARDC, CIF, CIK, CJNK, DHG, DHY, DSU, EAD, FHY, GGM, HHY, HIX, HYG, HYLD, HYLS, HYT, IVH, JNK, JQC, JSD, KIO, MCI, MHY, MPV, NHS, PCF, PHF, PHT, QLTC, SJB, UJB, VLT
by: Hale Stewart

My Weekly Indicator post on Saturday highlighted the decline in corporate bond yields, which in the case of BAA bonds, has been 3/4's of a percent:

One hundred years of data says this is important. Only three times in the last 100 years have corporate bond yields declined going into a recession (1925, 1945, 2001). Twice, after rising into a recession, they have remained stable and declined only after the recession was over (1920, 1974). In the remaining 12 times, corporate bond yields peaked at some point during the recession and began to decline in its latter stages.

Here's the graphic evidence. First, monthly BAA yields from 1919 through 1934:

From 1934 through 1962:

Weekly reports start in 1962. Here they are through 1994:

Daily reports start in 1992. Here they are through the present:

There certainly have been some false starts (1920, 1970) but with the exception of the great 1929-1932 contraction and the big 1981-1982 recessions, these were under 1/2%. And certainly during expansions, there are fluctuations.

While I am not forecasting the direction of corporate bond yields from here, what I can say is that the vast majority of the time in the last 100 years a move of this magnitude has indicated that a recession - or a slowdown as in the case of 1998 - was in its latter stages. Or already over.