What happens when junk bond spreads and stocks stop moving in sync? This excerpt from the July Elliott Wave Financial Forecast explores a divergence our analysts are watching closely.
EWFF has long noted that junk bond credit spreads and stocks tend to trend and reverse together. In the event of bankruptcy, junk debt is one rung above equities in the pecking order of who gets paid. When the trend between the two assets diverges, it is meaningful.
[The chart below] shows the S&P 500 and the CCC-rated junk bond spread, which is the yield on CCC-rated debt — debt that has a high risk of default — minus the yield on comparably dated U.S. Treasuries. To align junk debt spreads with the S&P, we inverted its scale.
… Starting in late January, [junk bond spreads] widened sharply. … Equally important, the widening in junk spreads has broken a trendline from October 2022. …
This is just one of many signals our analysts are tracking.
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