Stocks Drop As Credit Spreads Start To Widen on March 25, 2024

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Stocks finished lower on Monday, with a good portion of the decline coming in the final 10 minutes, when a nearly $2 billion sell imbalance was posted for the closing cross. Meanwhile, the VIX was higher while rates and spreads rose. The dollar took a break following a colossal move last week.

One spread to watch here is the difference between the Italian and German 10-year rates because the spread has contracted a lot since October. Now, it appears to be breaking a short-term downtrend, and the RSI shows signs of turning higher, which could indicate that a widening of this spread is starting.

This spread is a good gauge for risk. When it falls, just like any spread, it indicates a feeling of no worries in the market, and when it rises, a feeling of nervousness. It is also sometimes a good leading indicator for high-yield credit spreads here in the US, and the ratio of the SHY/HYG or the BofA High Yield OAS Index tends to follow this spread between German and Italian bonds.

Widening spreads are also associated with a rising VIX index.

When you piece all of this together, it explains why stocks were lower. As we know, when spreads widen, the earnings yield of the S&P 500 rises with it.

So, while this may seem silly to some, or that it doesn’t matter, these credit spreads are probably more than any AI narrative the media can come up with because, at the end of the day, when these credit spreads start to widen, financial conditions tigthen, and liquidity is removed from the market. Keep an eye on them.

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks. For research syndication, licensing, or consulting inquiries, visit michaeljkramer.com.

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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.