The Cycle Matters - We Are Seeing That In Credit


  • While corporate bond ETFs are rising, a majority of the gain has been due to lower Treasury rates as spreads are actually wider.
  • Corporate bond spreads started to widen when the global cycle peaked.
  • We remain in a widening phase that started in January 2018.
  • Looking for more? I update all of my investing ideas and strategies to members of EPB Macro Research. Get started today »

The Cycle Matters - We Are Seeing That In Credit

As we enter the second half of the calendar year, optimism surrounding a rebound in economic growth is fading as signs of an economic recovery are not yet in sight. The global PMI peaked in December 2017 and has hit a fresh low as of the latest available data point.

Credit is confirming this story although there are several analysts, including high profile media pundits that continue to point at popular investment grade corporate ETFs to refute the deceleration in growth that is now greater than 18 months old.

Tuning into popular market shows and you hear comments such as "widely followed investment-grade ETF is making 52-week highs" which carries the connotation that it is credit doing the heavy lifting.

Looking at the chart below confirms the commentary above, popular investment grade ETF (NYSEARCA:LQD) is hitting a 52-week high. Does this mean the all-clear bell has been sounded?

Unfortunately not.


Source: Bloomberg, EPB Macro Research

Investment grade ETF (LQD) is comprised primarily of BBB-rated corporate bonds with an effective duration in the neighborhood of eight.

LQD ETF Breakdown:

Source: YCharts, EPB Macro Research

When we look at the effective yield of BBB-rated debt, we see a plunge in the interest rates from nearly 5.0% to 3.6%, a bullish indication as corporations can borrow at relatively cheaper rates.

BBB Effective Yield:

Source: Bloomberg, EPB Macro Research

At the same time, however, while the effective yield is declining and the LQD ETF is hitting new highs, the credit spread, or the yield on corporate paper above equal maturity Treasury bonds has been widening since the latest pivot in economic growth (December 2017).

BBB Option-Adjusted Spread:

Source: Bloomberg, EPB Macro Research

The growth rate cycle is highly important as it pertains

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This article was written by

Eric Basmajian profile picture
Tracking Economic Inflection Points To Guide Your Asset Allocation Strategy

Eric Basmajian is an economic cycle analyst and the Founder of EPB Macro Research, an economics-based research firm focusing on inflection points in economic growth and the impact on asset prices.

Prior to EPB Macro Research, Eric worked on the buy-side of the financial sector as an analyst at Panorama Partners, a quantitative hedge fund specializing in equity derivatives. 

Eric holds a Bachelor’s degree in economics from New York University.

EPB Macro Research offers premium economic cycle research on Seeking Alpha. 

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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