• The Credit Market historically leads the Stock Market. Watch the Credit Markets for an early warning.
  • The Credit Market warns first via the cost of Protection (Credit Default Swaps), then the cost of Risk (High Yield Spreads) then via the cost of Yield ('Junk Bond' Yields). All three are shown below and though look "tenuous" are not yet warning.
  • Central Bank Liquidity flows are presently sustaining the "Leveraged-for-Yield" Speculators. Any slowing in the rate of liquidity injections will quickly begin showing in credit areas of: 1- Cost of Protection, 2- Pricing of Risk and 3- Inflation Adjusted Yield.


PROTECTION: Credit Default Swaps
Global sovereign CDS' have become extremely cheap on a historical basis as central banks across the world have adopted policies of further Monetary easing. Protection pricing is in most cases less than 1/3 of what it was in 2012 during the EU Banking Crisis.

RISK: High Yield Spreads
High Yield Corporate Bond Spreads have steadily fallen in the post 2008 Financial Crisis with the adoption of Financial Repression Monetary Policies of QE (US), QQE (Japan), TLTRO (EU) etc. As nominal yields approach the zero bound there is clearly a historic "mispricing of risk" which is exposed to a destabilizing shock of the highly leveraged and fragile financial edifice.
High levels of institute balance sheet "gearing" or leverage continues to be sacrificed to achieve yield in a low yield environment.
YIELD: Junk Bonds (JNK)
The High Yield (Junk) market is technically on a "knife's edge" ..... any shock could and will tip it into a selling abyss of of no buyers - only forced sellers!
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Trend Following Analysis along with technical divergences are suggesting a strong potential for a trend reversal before late spring.
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