So Far, "This Time Is Different"
Five months into the deepest 2s10s inversion in the last 40+ years, corporate bond spreads are not caving.
The 2s10s curve has been inverted for five full months, and at today’s close of -76bps, the inversion has not been this deep in more than 40 years. I explained the risks of a sustained inversion of this yield curve in this piece. The “Too Long/Don’t Read” version is that, over the last 28 years, sustained inversions of curves involving funding terms (6 months to 2 years) have always preceeded a cratering of corporate credit and a financial crisis.
But almost everything about, and surrounding, the current equity bear market has been different than any of the other bears since 1994. Just to name a few of these differences:
First time that treasury rates have risen because of a meaningful spike in inflation;
First time that the rise in treasury rates (while credit spreads remained benign) has not coincided with the most intense upside moves of the pre-existing equity bull market;
First time that such a sustained and deeply inverted 2s10s curve has not caused corporate risk spreads to blow out, at least so far. At today’s close, Investment Grade and High Yield spreads are about 125bps and 445bps respectively, well below the “rule of thumb danger thresholds” of 150 and 500bps;
First time that the deep/sustained inversion has not caused parts of the financial markets to break. I would even argue that the current bear market has decimated primarily unicorns and shitcos, a long overdue and necessary cleansing needed ahead of a new, long, and strong bull market;
First time that new issuance of corporate bonds has all but dried up: 3 consecutive months of sub $100b issuance, including September, which, over the last 9 years, has averaged $201b. One can argue this issuance strike is the result of companies not wanting to pay the high coupons, and buyers waiting for fat pitches. Be that as it may, the last time issuance was this bad for this long was 2015 during the energy E&P meltdown, which many thought would bring down a good number of banks. No such worries are being discussed right now; to the contrary, almost all systemically important financial institutions have never been in better shape.
This is by no means an exhaustive list, but you get the idea: this bear market is a reincarnation of the bears of yesteryear, when stocks were driven by earnings, interest rates, and other macro forces, rather than by the sale of corporate bonds to fuel trillion of dollars of buybacks.
So at risk of jinxing the whole thing and waking up to a meltdown coming out of left field, I will say it: this time - this Bear - is different…at least so far, and to get through it, it may well require dusting off playbooks last used when many traders and financial pros were not even born.