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The Spread Thread

@SpreadThread1

2 years

For those newer to corporate debt markets, we put together a primer on basic credit concepts such as recovery rates, the capital structure “waterfall,” leverage and the basics of covenants. See the following thread for details. 1/20

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The Spread Thread

@SpreadThread1

2 years

Credit markets will become increasingly important to watch into 2023, in my view. I thought a somewhat basic primer on corporate credit might be useful for those new to the asset class and looking to learn. See the thread below for details. 1/17

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The Spread Thread

@SpreadThread1

2 years

Good article from bbg about private credit, which is starting to show bigger cracks (“Default rates almost doubled last year to 4.2% from 2.2% in 2021”). Private credit is an area we've discussed, which experienced tremendous growth this cycle. 1/3

The Spread Thread

@SpreadThread1

2 years

Our first idea, we like shorting BDCs as a play on private credit markets, which we believe are highly at risk as the credit cycle (and economy) turns. Detail in the thread below. 1/9

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The Spread Thread

@SpreadThread1

1 year

As of today's close, some big moves in fixed income. Not only are Treasury yields rising sharply but spreads are finally also responding at the same time. The net effect - a sharp increase in borrowing costs/ tightening in financial conditions this week. A few charts:

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The Spread Thread

@SpreadThread1

2 years

Now that I have a few followers (thanks @MrBlonde_macro ) - a quick thread on positioning My preferred 6-12M trade in credit (or cross asset) is in a nutshell: long rate risk vs credit risk - IG > Lev Loans - BBs > CCCs - Long duration IG > SPX - 5Y Treasury bonds > HY 1/5

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The Spread Thread

@SpreadThread1

2 years

Is this a soft landing rally? or a things are getting worse (bad is good) rally? Most of the optimists are arguing the former. But this recent rally has coincided with another 100bp of cuts priced into next year. 1/2

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The Spread Thread

@SpreadThread1

1 year

Arguably, this is often the price action you get late cycle, when policy is tight, but before the economy has broken. HY all-time tights June '07, stocks ripping mid-06 through Oct 07, Nasdaq 99/00. It's around when the active stimulating begins that price action gets ugly.

Bob Elliott

@BobEUnlimited

1 year

Market action doesn't look like this when money is tight. It looks like this when the Fed is either behind the curve or actively stimulating:

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The Spread Thread

@SpreadThread1

2 years

Cracks in credit markets are growing. Credit probs will feed into the labor market (eventually) and a weaker labor market will feed back into credit mkts -> Credit Cycle 101 -CRE defaults -subprime/low-income delinquencies -Bankruptcies creeping up -A few banks needing capital

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The Spread Thread

@SpreadThread1

1 year

We thought it would be useful to post a fundamental analysis on $VNO given all the focus on CRE. In short, while problems in office are now well known, and there may be some rel val opportunities, we are for the most part staying away at current levels. 1/14

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The Spread Thread

@SpreadThread1

2 years

This chart is a big reason stocks aren't pricing in a downturn IMO - quite the opposite, they seem to be pricing in an acceleration in activity. That may turn out to be the case. But if you think activity has further to fall this year, cyclicals vs defensives are mispriced.

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The Spread Thread

@SpreadThread1

2 years

Quick summary of the Fed Senior Loan Officer survey just released. The question on banks expectations going forward: "Banks, on balance, reported expecting lending standards to tighten, demand to weaken, and loan quality to deteriorate across all loan types." 1/5

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The Spread Thread

@SpreadThread1

2 years

Our first idea, we like shorting BDCs as a play on private credit markets, which we believe are highly at risk as the credit cycle (and economy) turns. Detail in the thread below. 1/9

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The Spread Thread

@SpreadThread1

1 year

We just published the first report on our new website where we lay out the progression of a typical credit cycle and how the market today fits into this analysis. Yes, I’m biased, but I highly encourage you to read the report if you get a few minutes.

The Evolution & Analysis Of An Economic Credit Cycle

A framework for analyzing the credit cycle that occurs in public debt and equity markets and how this impacts the Fed's policy response.

www.thespreadsite.com

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The Spread Thread

@SpreadThread1

2 years

I was travelling for much of the last few weeks. Finally had time to sit down and reassess markets. Below are some updated thoughts. Bottom line: Be patient – you are getting paid to wait. 1/10

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The Spread Thread

@SpreadThread1

2 years

Credit markets are getting interesting again, with relevance to all markets... Hopefully I can help you navigate as the credit cycle turns. Yields are near decade highs, making high quality credit a competitive asset class again, but spreads are very far from recession levels...

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The Spread Thread

@SpreadThread1

2 years

For those who believe a 5% FF rate is manageable and that interest costs for corporates are still low, this is an important chart. It shows yields for the leveraged loan index– now at ~9%. And these are floating rate loans where interest costs will rise with every rate hike. 1/7

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The Spread Thread

@SpreadThread1

2 years

Outside of the ZIRP era, each time the ISM Index fell to 49 or below, like today, the Fed was either already cutting or would cut within 3 months. This time, the Fed is about to hike by 50bp (which the market is cheering) and promising to hold rates above these levels. 1/3

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The Spread Thread

@SpreadThread1

1 year

We often hear about the health of balance sheets, yet defaults/delinquencies are clearly rising. In our view, aggregate macro data often misses a very bifurcated economy, that matters going forward. Thread (and link to this week's report) below. 1/14

The Haves and Have Nots

Despite the perceived health of balance sheets, defaults are rising. Aggregate macro data misses a bifurcated economy.

www.thespreadsite.com

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The Spread Thread

@SpreadThread1

1 year

A reminder, HY spreads were at all time tights ~240bp in Jun '07 (vs 450bp now), months b/f the worst recession of our lifetime. CCCs were sub 400bp then (vs 928bp today). Don't look for credit to give you miles of warning- it is also susceptible to the narrative of the moment.

Gunjan Banerji

@GunjanJS

1 year

“There’s absolutely no evidence of a recession risk-premium” in the junk-bond market Spreads have hovered around 4.4 percentage points, down from a peak of 5.2 in March. During recessions--it's typically 8 percentage points or more @WSJmarkets @mattgrossman

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The Spread Thread

@SpreadThread1

2 years

I’ve shown charts of high corp lev and the pushback is usually: ‘but int cov is high and a lot of debt is fixed.’ All true. But remember, a big driver of ST changes in debt/EBITDA and EBITDA/int expense is earnings. And we are currently near peak earnings, way above trend. 1/4

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The Spread Thread

@SpreadThread1

2 years

Overall defaults are still low but have risen now for 2 straight months. This trend is likely to get worse not better, given a combination of: -Margins getting squeezed -A higher cost of debt -Tighter lending standards, limiting access to capital for those who need it

Win Smart, CFA

@WinfieldSmart

2 years

Bankruptcies for US sponsor-backed companies have now increased for four consecutive quarters, according to data from S&P Global Market Intelligence. Twenty portfolio companies filed for bankruptcy during the fourth quarter, up from 15 in the third quarter, and nearly doubled the

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The Spread Thread

@SpreadThread1

11 months

For those who are interested, the thread below summarizes our recently published note on agency mortgage REITs. 1/14

Agency Mortgage REITs: Leveraging An Attractive Asset Class

Rising rates and widening MBS spreads have driven significant declines in book value for agency mortgage REITs. We like buying mREITs and walk through the sector in detail.

www.thespreadsite.com

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The Spread Thread

@SpreadThread1

10 months

Lots of explanations for the continued rally in bonds. Sometimes simplest is best – yields are falling as data increasingly surprises to the downside, with 4Q growth tracking ~1%. 1/5

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The Spread Thread

@SpreadThread1

1 year

My response: 1) 46% net tightening this quarter vs 44.8% last quarter doesn't mean nearly unchanged lending standards in 2Q. It means a net 46% of banks further tightened lending standards vs 1Qs already tight levels.

Bob Elliott

@BobEUnlimited

1 year

The SLOOS ended up better than expected and in line with the picture indicated by the actual credit data I talked about this morning. Vast majority of tightening occurred *prior* to SVB. ‘Crisis’ not causing a crunch following. Here is C&I:

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The Spread Thread

@SpreadThread1

1 year

We started looking closely at financial prefs and stressing balance sheets - starting w/ Ally ~10.3% perp sub prefs. Even in a severe scenario, they are likely covered. But we are holding off even at curr yields given the likelihood of an ‘overshoot’ as credit issues spread. 1/13

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The Spread Thread

@SpreadThread1

2 years

Alot of comments on the rally in cyclicals (CAT, AXP, etc...) and how it may be signaling an 'all clear.' In May, '08 AXP rallied 27% and CAT rallied 36% to an all-time high. A reminder - the market often tries to look through the econ weakness in a bear market - until it doesn't

Lawrence McDonald

@Convertbond

2 years

Drawdowns in Recessions American Express AXP -85% (2009) -61% (2001) -50% (2020) -12% (current)* *Friday, AXP equity was 12% off an all-time high. Tiffany (the Blue Box), LVMH Moet Hennessy Louis Vuitton LVMH is at an all-time high.

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The Spread Thread

@SpreadThread1

1 year

We just published a note with some thoughts after this year’s big rally. In short, a lot of what we see is consistent with very late-cycle periods, including stocks rallying hard and tight credit spreads. Sign-up (no cost) to get these reports emailed.

A Late Cycle Melt Up

The year-to-date rally in markets is highly consistent with late cycle conditions. We analyze why this is the case as compared to history.

www.thespreadsite.com

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The Spread Thread

@SpreadThread1

8 months

Despite all the calls for the curve to un-invert through rising long-end yields, looks like the un-inversion is coming through a bull steepener, as it almost always does. Once again, this cycle may not be as different as commonly perceived.

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The Spread Thread

@SpreadThread1

2 years

A few Thursday thoughts: Recent price action shows the needle the Fed has to thread to achieve a soft landing. Just modest acceleration in an overheated late cycle econ leads to more tightening. While weaker data would bring focus back to the cracks forming in various markets 1/8

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The Spread Thread

@SpreadThread1

1 year

Since this chart is making the rounds - thought I'd send a longer history. Yes, equities are rich to fixed income, which matters long term, but it can persist (see late 90s). I think stocks will cheapen as earnings expect again roll, but short term you need more than valuations.

Holger Zschaepitz

@Schuldensuehner

1 year

For the first time ever yield on cash, bonds, & equities is the same. The yield on 3mth US Treasury bills was 5.3% this week after Fed held interest rates at between 5-5.25%. That is the same level as the expected 12mth forward earnings yield across the S&P 500, which has risen

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The Spread Thread

@SpreadThread1

2 years

Car loan rates keep rising... Some fun with math: You bought a house ($450k ~median) before mortgage rates spiked (assuming 2.5% mtg rt, 20% down). Payment: $1,422/mo Today you are feeling good about life and buy a $62k used car (10.57% rt, 0% down, 60mo) Payment: $1,432/mo

Car Dealership Guy

@GuyDealership

2 years

New month, new record 😵‍💫 Average APR for a car loan in January: New Cars: 6.92% Used Cars: 10.57% (!!!) (via Edmunds)

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The Spread Thread

@SpreadThread1

9 months

Many now believe that because financial conditions eased substantially in Nov/Dec, another bout of accelerating growth/inflation is on the way. And lots of questions on why the Fed hasn’t pushed back harder. I see the argument, but am skeptical. 1/8

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The Spread Thread

@SpreadThread1

2 years

A simple but important point on valuations as 2022 wraps up. Many asset classes enter 2023 optically much cheaper. But adjusting for the move in interest rates, valuations in many cases haven't moved much. For example, IG credit just had its worst yr (back to '89) 1/5

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The Spread Thread

@SpreadThread1

2 years

The default cycle may become an important theme over the next year. Below is a framework for how I think about it. In short, default cycles typically have different catalysts/problem sectors over time. But the basic structure is usually very similar from one to the next. 1/15

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The Spread Thread

@SpreadThread1

1 year

If you are in the camp that borrowing costs don't matter because of fiscal, high income growth, high cash yields, or just because, then disregard. If you think they do matter, then note - every pocket of the economy has seen a sharp increase in borrowing costs over the past 2 wks

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The Spread Thread

@SpreadThread1

2 years

Ugly credit move into the close. Looks like a new closing low for $KRE as well.

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The Spread Thread

@SpreadThread1

6 months

It’s been a little while since I’ve put together an update on credit. See below for a brief update – spreads, yields, issuance, defaults… 1/12

Credit Check

Credit has rallied aggressively so far this year, continuing the bull market that begin in late 2022. A brief update.

www.thespreadsite.com

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The Spread Thread

@SpreadThread1

2 years

Bob- Respectfully pushing back in a short thread. Yes, I agree that this isn’t ’08. All the leverage upon leverage all tied back to the banking system back then. Very different today. But I am more concerned about a credit crunch than you are. 1/6

Bob Elliott

@BobEUnlimited

2 years

CRE loans by small banks have gotten a lot of attention from the ‘bank crisis’ crowd so lets get sense of largest possible risk: 2tln outstanding, a 5yr x 3% charge off is 300bln. NIM to 2pct on 5tln loans yields 100bln/yr. 200bln cushion before touching 700bln of capital.

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The Spread Thread

@SpreadThread1

1 year

Just published a deep dive on multifamily REITs (link below). In short, we think the risk/reward is unattractive given worsening rent growth and vacancies, tight cap rates, headline risk for CRE, and better alternatives for yield-focused investors. 1/3

Multifamily REITs, Sector Overview & Expected Equity Returns

A detailed review of the multifamily apartment sector with specifics on macro data, the debt market and the publicly traded REITs.

www.thespreadsite.com

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The Spread Thread

@SpreadThread1

1 year

With bank earnings mostly done, we compiled loan growth name-by-name, shown below. In short, at a single-name level, lending for the regional banks has decelerated for the past several quarters, with roughly zero loan growth (Q/Q wtd avg) in 2Q23. 1/3

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The Spread Thread

@SpreadThread1

2 years

Macy's warned on 4Q sales, saying “the lulls of the non-peak holiday weeks were deeper than anticipated.” And “Based on... our proprietary credit card data, we believe the consumer will continue to be pressured in 2023, particularly in the first half." 1/3

Macy's warns holiday-quarter sales will come in light, citing squeeze on shoppers' wallets

Macy's on Friday said consumers' budgets are under pressure and that it expects the squeeze to continue into this year.

www.cnbc.com

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The Spread Thread

@SpreadThread1

2 years

A few updated market thoughts post Fed: You’ve heard enough Fed takes. Part of it was dovish, part hawkish, but the simple fact is whether its 1 or 2 more, markets got confirmation that an end is near in the tightening cycle, at least for now, and investors can run with that. 1/9

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The Spread Thread

@SpreadThread1

1 year

I’ve seen several charts showing markets usually rally after the last rate hike. The rationale- during the pause markets can dream of a better liquidity backdrop and only a modest slowdown. But the question is how long can markets dream? Context is key 1/8

Carl Quintanilla

@carlquintanilla

1 year

GOLDMAN: Stocks have “generally rallied .. following the end of past Fed tightening cycles. .. The exceptions were when the economy entered recession near the end of tightening .. Our baseline year-end $SPX forecast of 4000 .. would be a break with the historical pattern.”

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The Spread Thread

@SpreadThread1

1 year

Using a very crude relative valuation measure: credit yields - forward earnings yields, IG credit is now cheaper vs equities than it has been this cycle, at relative valuations last seen when credit was very dislocated in 2008.

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The Spread Thread

@SpreadThread1

2 years

I don’t have very high conviction on the long end of the curve. But I do think it is notable that the move up in long yields has been very modest despite all the hype around strong Jan growth/inf data. And today a big long-end rally despite solid services data. 1/4

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The Spread Thread

@SpreadThread1

2 years

I’ve used Tech/Ind as a proxy for ‘Goldilocks’ with the idea that slower but pos growth/ lower rates could help Tech. That was the narrative in Jan. Note, Tech outperformance stalled around the Fed payroll report. Peak ‘Goldilocks’ transitioned to ‘acceleration/ no landing.' 1/4

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The Spread Thread

@SpreadThread1

2 years

But my bottom line – this is a levered economy built in, and structured for, a very low-rate environment. The rate shock has been huge, and it's just starting to be felt in corporate America. It is not going to be absorbed quickly or painlessly. 7/7

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The Spread Thread

@SpreadThread1

2 years

I vividly remember the recession head-fakes of last cycle - 2011/16/4Q18. Each time I start thinking this could be another, I can't get past the chart below. In each of those instances, the Fed was not in restrictive territory and still quick to ease. This chart keeps me patient

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The Spread Thread

@SpreadThread1

2 years

A lot of discussion on how stocks are holding up as rates push higher. Could simply be an example of ‘give it time.’ Or positioning/liquidity considerations I’m missing. I’m probably underthinking it - some of the equity resilience makes sense, and some doesn’t. 1/8

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The Spread Thread

@SpreadThread1

1 year

This is how what seems like a manageable problem become systemic - markets continue to search for the next problem/who is exposed, whether the fears are rational or not. Then large chunks of the economy retrench at the same time - i.e., market price action drives fundamentals

boaz weinstein

@boazweinstein

1 year

A new front in the battle opened up this week - life insurers. The fundamental rationale is CRE and financials exposure even if they don’t have the HTM issues of the banks.

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The Spread Thread

@SpreadThread1

2 years

Where is the leverage in the economy? The following thread is in response to the questions/comments I have received about sources of debt and leverage. Please forward/follow if you find this analysis helpful. 1/13

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The Spread Thread

@SpreadThread1

2 years

Just to add - Banks are now tightening standards for C&I loans at a similar rate as 2Q08. The % reporting stronger demand for C&I is less than '07 or '08 (2009 was worse). This is what happens when the cost of debt for floating rate borrowers goes from 4% to 9% in a year.

The Spread Thread

@SpreadThread1

2 years

Quick summary of the Fed Senior Loan Officer survey just released. The question on banks expectations going forward: "Banks, on balance, reported expecting lending standards to tighten, demand to weaken, and loan quality to deteriorate across all loan types." 1/5

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The Spread Thread

@SpreadThread1

1 year

Lots of debate around whether this is a new bull mkt or not, and understandably so given the magnitude and duration of the rally. I find it more helpful to think about a late-cycle environment in phases, and how the current rally is not that atypical in this context. 1/7

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The Spread Thread

@SpreadThread1

2 years

Good article walking through issues around some of the recent CRE office defaults. "delinquency figures have been creeping higher in recent months, and 16% of office loans maturing in 2023 are already delinquent"

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The Spread Thread

@SpreadThread1

2 years

It's logical to assume higher 2Y yields should be dragging 10Y yields higher. But it's not really happening. Worth thinking about why? It may require either 1) a belief that the Fed will tolerate a hotter econ or 2) an external factor like rising ex-US bond yields or selling MBS.

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The Spread Thread

@SpreadThread1

1 year

Given this spike in rates, a meaningful portion of credit now trades at deeply discounted prices, which matters for valuations. Below- details on how to quantify the fair spread differential for high vs low dollar priced corp bonds. Warning: bond math 1/9

A Below Par Report

We walk through how to quantify the fair spread differential for high vs low dollar priced corporate bonds, especially relevant as rates rise.

www.thespreadsite.com

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The Spread Thread

@SpreadThread1

2 years

Recent market dynamics show the challenge of threading the soft-landing needle, with a tight labor market, lingering inflation and a restrictive Fed. Just a modest pickup in growth -> back in ‘acceleration’ Just a modest drop in growth -> recession again in play. 1/6

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The Spread Thread

@SpreadThread1

10 months

Note/thread below with some market thoughts... We continue to see large swings in sentiment in 2023, and it has paid not to get caught up in a narrative for long. Recession-> H4L-> bank crisis-> soft landing-> fiscal crisis. Now back to soft landing. 1/11

Zombies Among Us

How much of this economy is only managing due to locked in ZIRP-era funding? Likely more zombies than appreciated.

www.thespreadsite.com

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The Spread Thread

@SpreadThread1

1 year

Turns out it wasn't just regional banks that didn't plan for rate hikes. Good article on the lack of hedging in the loan market. These numbers suggest meaningful default rates - and this is only based on the rate increase, not factoring in the earnings decline that may come next.

Win Smart, CFA

@WinfieldSmart

1 year

Private equity firms opted against hedging arrangements that could have shielded companies saddled with $3 TRILLION in floating-rate debt from rising interest costs, that in some cases, doubled or more $BX $KKR $HYG $JNK

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The Spread Thread

@SpreadThread1

2 years

Though I’ve been cautious on credit, and still very much am, I think there are some rel val opportunities for investors to add credit risk and reduce equity exposure, especially with yields again pushing near the highs. But I would only do so in select cases. 1/7

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The Spread Thread

@SpreadThread1

2 years

As real estate redemption headlines continue appearing, below is a framework to help understand cap rates and the divergence between public and private REITs. 1/14

Bloomberg

@business

2 years

Institutional investors are seeking to pull $20 billion from massive property funds, the most since the Great Recession

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The Spread Thread

@SpreadThread1

2 years

The Bloomberg chart below is floating around showing growing distress in credit. Here is another way of looking at it. CCC spreads have not rebounded with better quality credit in this little rally. This is a better signal of future default risk than simply headline HY spreads.

Daniel Lacalle

@dlacalle_IA

2 years

Credit Market Cracks Widen as Distressed Debt Nears $650 Billion

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The Spread Thread

@SpreadThread1

2 years

And the probs always look idiosyncratic at first. -"Office CRE only a problem b/c of work from home," -"SIVB just bad management." But they're not idiosyncratic. Rising rates are exposing the vulnerabilities in the economy. Always slowly at first while the econ is still strong.

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The Spread Thread

@SpreadThread1

2 years

The calls for 'soft landing' are growing louder (see tweet below). But I've yet to hear a compelling argument for why better inflation readings are not simply a result of a weakening economy (housing, manufacturing/services new orders, etc...) 1/7

Mark Zandi

@Markzandi

2 years

The deeper I look into the bowels of last week’s job market data, the more I think we can skirt a recession. That’s because businesses aren’t laying off workers and unemployment is at a half century low, but regardless, job market slack is forming, and wage pressures are abating.

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@SpreadThread1

1 year

Good article about increased stress in the auto lending market...

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The Spread Thread

@SpreadThread1

1 year

HY and IG cash spreads still well above the YTD low in spreads, despite the SPX now at YTD highs. Note, credit is tracking the S&P equal-weighted index quite closely - so to some extent the same story of large-cap tech vs everything else.

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The Spread Thread

@SpreadThread1

1 year

Published and emailed a note yesterday. Summary and link below. In short, we are not trying to top tick bond yields but do see increasing value in high-quality longer-duration fixed income. Plus a few other mkt thoughts. 1/9

Duration On Sale

With this rise in rates, yields for high quality fixed income stand out as at least relatively cheap vs very tight credit spreads and elevated stock valuations.

www.thespreadsite.com

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The Spread Thread

@SpreadThread1

2 years

I know we are focused on banks this week, but here are stocks/bonds for the largest office REITs...

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The Spread Thread

@SpreadThread1

2 years

Lots of calls that housing has bottomed. That may be. But just stating the obv- it doesn’t have to drop in one straight shot. It’s very possible activity could stabilize w/ falling rates then resume the decline for lots of reasons - UE starts to rise, fin cond tighten again, etc

Peter Berezin

@PeterBerezinBCA

2 years

Mortgage applications and pending home sales have seemingly bottomed, while homebuying intentions have surged. I thought we were supposed to be entering a recession?

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The Spread Thread

@SpreadThread1

2 years

This is important. There has been a dramatic increase in funding costs for small/mid-sized businesses, the engines of this economy and job creation, and a meaningful tightening in credit conditions. Tighter credit conditions lead defaults by about 4 quarters.

Ian Harnett

@IanRHarnett

2 years

Credit remains the key to the outlook for 2023. Todays NFIB data has lots of interesting takeaways, but for me, this was the important one…small and mid-cap companies are finding it harder to get funding… at some point credit spreads will respond

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The Spread Thread

@SpreadThread1

11 months

Just got my health insurance premium info for 2024. My premium will go up 8.2% next year. After +12% in ‘23. Up $1,879 for the year (fam of 5) in total. And that’s already the high deductible plan so no real option to cut that cost. Has to hurt for lots of families

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The Spread Thread

@SpreadThread1

5 months

Often (but not always) credit spreads will tighten when Tsy yields are rising, leading to a more muted increase in credit yields. Last fall, credit initially ignored the big bond selloff, but spreads eventually began widening at the same time Treasury yields were rising... 1/6

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The Spread Thread

@SpreadThread1

1 year

Obviously bank issues are fast moving and changing by minute. Some of what’s going on is rationale driven by fundamentals, and some is clearly irrational. But as we see time and time again, that’s how seemingly small problems can become bigger. 1/5

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The Spread Thread

@SpreadThread1

1 year

Good example of why there are lags with rate hikes. And it’s not just CRE. Throughout the economy you will see examples where a greater number of borrowers feel the impact of higher rates as time passes. From a Bloomberg interview with Barry Sternlicht.

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The Spread Thread

@SpreadThread1

1 year

SLOOS charts below for those interested. First, the responses to the 3 special questions asked in this survey. 1/9

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The Spread Thread

@SpreadThread1

1 year

While it’s fun to have the recession debate daily, if the end goal is to make $, since peak H4L in late-Feb, positioning for weak growth has worked: defensive > cyclical outperformance, large (liquidity) > small (real economy), pricing rate cuts, gold > copper, etc… 1/6

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The Spread Thread

@SpreadThread1

2 years

On the back of this dreadful Empire Manufacturing data, a reminder that markets are increasingly pricing in Goldilocks.

Bloomberg Markets

@markets

2 years

New York Manufacturing Activity Plunges to Lowest Since May 2020

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The Spread Thread

@SpreadThread1

2 years

This is what tighter credit conditions for non-bank lenders (bond/loan/securitized) looks like. Obviously the extent of this pullback in non-bank lending will depend on volatility in markets over the next month or two.

Florian Kronawitter

@fkronawitter1

2 years

To be clear, even if banks recede from headlines in coming days, the credit crunch will continue

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The Spread Thread

@SpreadThread1

2 years

For those looking to get involved in credit, here is a list of credit ETFs I follow. This is by no means everything, but most of the larger funds. -YTM is the yield of the closest benchmark (approx. yield of underlying bonds) -Div yield is based on latest dividend (so noisy) 1/4

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The Spread Thread

@SpreadThread1

1 year

I continue to see wide-ranging views around recent banking issues. I’m still in the camp that there are a lot of possibilities between a non-event and another Lehman crisis - such as my view - recent bank stress will exacerbate already tight credit conditions. 1/7

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The Spread Thread

@SpreadThread1

1 year

First some argued bank stress was just about a ‘few mis-managed banks,’ now it’s ‘speculation.’ In my view, there is very much a fundamental element to what is going on with regional banks and it is not just one obvious issue that's easy to solve. 1/5

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The Spread Thread

@SpreadThread1

1 year

Economic surprise indices may be rolling over, as expectations for accelerating growth likely got too lofty over the past month or so. Worth paying attention to, as bonds have loosely correlated with macro surprises over the past year.

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The Spread Thread

@SpreadThread1

9 months

For those looking for some educational material over the Holidays, we just published a primer on Corporate Credit on our website. It is meant for those with a low-to-moderate understanding of credit markets. Link below:

Corporate Credit Primer

A primer on corporate credit including IG and HY bonds, leveraged loans, CDS, credit analysis and credit technicals.

www.thespreadsite.com

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The Spread Thread

@SpreadThread1

2 years

@carlquintanilla @BullandBaird As a long-time credit strategist I can tell you the maturity profile of the HY market is always back-dated at the end of a bull market. It was in ‘00 and in ‘07. Leverage is the 'fuel' for a default cycle, tighter credit conditions is the 'match.' The maturity profile is noise.

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The Spread Thread

@SpreadThread1

2 years

@RaoulGMI But market internals aren't pricing in a 38 ISM, especially lately. JPM is 30% off its lows, industrials strong, HY spreads tight, front-end yields still high. Think we are still pricing for the rate shock, not the recession shock. Would CAT's chart look like this with a 38 ISM?

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The Spread Thread

@SpreadThread1

1 year

IG corporate yields now 6.27%, taking out the highs from last Oct.

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The Spread Thread

@SpreadThread1

1 year

Starting to look like we are moving beyond “normalizing”

Win Smart, CFA

@WinfieldSmart

1 year

LEVERAGED LOAN DEFAULTS

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The Spread Thread

@SpreadThread1

1 year

We published a quick note, assessing the damage in markets after this correction, and walking through some updated thoughts. Please see below for the link to the report and a summary thread. Feel free to add your email to receive these notes directly. 1/10

Assessing the Damage

We dig into the recent market selloff, and assess what markets may be telling us about the cycle, as well as how to position going forward.

www.thespreadsite.com

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The Spread Thread

@SpreadThread1

5 months

Had a small bond short which I covered and am now building a long position. The Fed is often late to the party as we know. My guess - Powell finally pivoting on the pivot means it’s mostly priced and time to start thinking about going the other way.

Diane Swonk

@DianeSwonk

5 months

Powell reluctantly capitulates. He was among those most hopeful for rate cuts & soft/no landing scenario. Now we will see what higher for longer really means; can we avoid even higher for longer? Maybe…but economy currently strong.

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The Spread Thread

@SpreadThread1

2 years

From Morgan Stanley “Not only do the data support our expectation for a 25bp hike in March, they should put 50bp firmly on the table for debate if January's pace of job gains is sustained.”

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The Spread Thread

@SpreadThread1

2 years

Here is a table showing the worst level for a handful of key macro variables at or before the SPX bottom in prior recessionary bear markets. (Note: for FF rate shows total cutting as of market bottom, and 2s/10s curve is as of the market bottom. A few takeaways: 1/4

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The Spread Thread

@SpreadThread1

2 years

High quality IG should perform best fundamentally at this stage in the cycle when earnings are falling. And technically, a ~6% yield will eventually be a big draw for many yield buyers. Quality credit is more competitive today vs equities than almost anytime post-crisis. 2/5

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The Spread Thread

@SpreadThread1

1 year

As $VZ and $T stocks make new lows on lead cable cleanup risk, some quick data on the debt. Note, while the stocks may not be that important to equity benchmarks anymore, these are the 1st (T) and 3rd (VZ) largest non-fin issuers in the IG cash index, so important to monitor. 1/3

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The Spread Thread

@SpreadThread1

1 year

HY yields up to 9.25%, with HY spreads widening by about 50bp in the past 2 weeks.

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The Spread Thread

@SpreadThread1

2 years

Low (but positive) growth environments have been ideal for credit. Low growth keeps corp behavior conservative (good for credit) and keeps funds flowing into yield products. Earnings may grow slower when growth is low but that’s ok for credit (less so for stocks). 1/2

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The Spread Thread

@SpreadThread1

2 years

I think the focus on slowing inflation, a plateau in the terminal rate, and a slower pace of rate hikes is yesterday's news. The next source of panic, in my view: the bar to remove very restrictive policy is high, yet recessionary conditions are broadening. 3/3

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The Spread Thread

@SpreadThread1

1 year

I’ve generally been conservatively positioned this year (cash/ defensives>cyclicals/ up-in-quality in credit) but not making any big directional index bets – arguing we are likely in the chop zone for a while. Today I bought a Sep 400/360 put spread on SPY. 1/6

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The Spread Thread

@SpreadThread1

2 years

Big 2-day move up in the expected terminal rate - now testing the Oct/Nov highs.

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The Spread Thread

@SpreadThread1

2 years

Interesting dilemma for Powell. Middle of the road inflation report. Inflation clearly coming down, but services sticky, while the labor market remains tight and financial conditions are easing. Does Powell push back on that by floating 50bp is still on the table?

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The Spread Thread

@SpreadThread1

1 year

Good article talking about some of the challenges for corporates with much tighter lending. Impt note- this time the stress is showing up first in smaller/private co’s – which is why you have to be careful looking at HY/IG spreads to imply all is fine. 1/3

Bloomberg

@business

1 year

Credit is drying up in pockets of the US economy. Here's why that's alarming for Americans

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