Credit markets haven't broken yet, but they're moving.

Oct 25
The regional banking system appeared to be being destroyed by rising bond yields back in March, but it turns out that a few banks were taking on too much interest rate risk. Bailouts, sales, and a Federal Reserve initiative to lend money to keep it liquid came after this.

If the situation changes, it will be considerably harder to avoid a recession, and the chance of a significant bankruptcy or institution failure sparking a financial crisis will also rise substantially. Since that time, credit has continued to flow, and the corporate credit markets have not yet collapsed. Credit is important, and it appears to be beginning to move.
Because smaller businesses are currently performing far worse than larger ones and are therefore much more vulnerable to the risk of rising interest rates, small businesses are a crucial indicator that something is wrong.

The small-business Russell 2000 index has dropped below pre-pandemic levels, thus giving up all of its gains since the decade's beginning. The 50 largest stocks in Russell's index have increased by over 50% throughout that time.

Large-cap stocks have outperformed smaller-cap companies for various reasons, but credit is probably the most significant.

Both their bond yields and small-cap stock prices are beginning to indicate that credit is becoming excessively tight.

This year, high-yield or junk bond spreads have remained extremely narrow, largely offsetting the harm caused by bank collapses in March. By any measure, spreads are still not excessive, but they are rising, and the trend seems to be higher.

Even the larger S&P 500 corporations are beginning to see some pressure. When low rates were available in 2021, treasurers did a fantastic job of locking them in, but they typically couldn't fund themselves for that long.

In the upcoming months, the bond market will damage many people. Embrace it. The trick will be knowing how to handle it when it happens.

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