17 May 2020
Source: Bloomberg & Momentum Global Investment Management.
What this chart shows
We last discussed the topic of credit spreads in January. As a quick reminder, a credit spread is the difference in yield between a credit instrument (such as a corporate bond) and a government bond of the same maturity. Back in January we commented that spreads were tight (or low) relative to historic levels.
That has since changed. This chart shows the spread of the broad US investment grade bond index during four periods in the last 20 years when the spread widened (or increased) significantly and the number of days that it took to reach its peak.
Market moves this year led to investment grade bond spreads widening by 300 basis points in just under 50 days (peaking on 23rd March), far quicker than any other period shown. In comparison, during the 2008 financial crisis it took over 400 days for the spread to widen by the same amount.
Why this chart is relevant
This chart reflects the panic that struck investors during the first quarter of this year as they grappled with the implications of the new coronavirus. A ‘dash for cash’ ensued as investors sold off risky assets. Only when the Federal Reserve intervened with a raft of stimulus measures, including investment grade bond purchases, was a further liquidity crunch and further widening prevented.
One possible explanation for the pace of the moves witnessed has been the increased use of ETFs by investors in recent years, making it easier and quicker to both buy and sell the credit markets. The speed and level of the spread widening witnessed this year may have hastened the response of the active investor, providing a narrow window of opportunity to add select credit exposure at valuations which compensated them favourably for the credit and liquidity risks taken. Of course, what moves wider quickly can also tighten quickly too.
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