One area of the market that does a nice job of offering a leading indication of financial conditions is the high-yield bond market. Also known as junk bonds, high yield bonds are ones issued to companies with speculative-grade credit ratings. These companies are at higher risk of default than investment-grade companies.
Junk bond spreads have been elevated, signalling stress in that area of lending.
During a public webcast on Tuesday, DoubleLine Capital’s Jeffrey Gundlach observed that credit rating downgrades were outpacing credit rating upgrades.
Gundlach noted that in the past, a tick below the blue line was “the beginning of something big.”
Now, while Gundlach wasn’t forecasting the market to tank, he did say that this was reason for caution from a monetary policy standpoint.
Currently, the market is betting that the Federal Reserve will begin tightening monetary policy with an interest rate hike in December. The risk is that the Fed ignites turmoil in the markets and is forced to loosen again.
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