A Credit Risk Gauge Is Edging Higher Even as U.S. Stocks Rise

(Bloomberg) -- Debt investors are getting slightly more concerned about North American credit risk, according to a derivatives index, even as better-than-expected earnings boost U.S. stocks for a fourth consecutive day. 

The Markit CDX North American Investment Grade Index widened about 0.8 basis point Wednesday to around 59.2 basis points as of 1:20 p.m. in New York and is on course to end a three-day narrowing streak. Meanwhile, the CDX High Yield index price fell about 0.11 cents on the dollar to around 107.17 cents. That weakening came even as the S&P 500 index rose about 0.6%.   

“Equities are living in a, ‘Powell got this!' world,” said Scott Kimball, managing director at Loop Capital Asset Management, referring to Federal Reserve Chair Jerome Powell getting inflation under control. “For investment-grade credit, that is not necessarily great news because it implies higher rates.”

Citigroup Inc. and JPMorgan Chase & Co. credit strategists have recently flagged examples of divergence between corporate debt markets and equities. Citi's strategists led by Daniel Sorid noted last month that this year's stock market drop has been mild for blue-chip companies with big debt loads, signaling that the largest borrowers may be better off than the equity market as a whole and that the outlook for corporate bonds is less bleak.

For the first three weeks of 2022, U.S. corporate bond spreads had widened less than one would expect given that the stock market was down by about 8%, based on historical movements since 2010, JPMorgan strategists led by Eric Beinstein and Nathaniel Rosenbaum wrote in a note dated Jan. 24.

That outperformance for corporate bonds makes some sense “in light of the fact that higher yields have been the main driver of the ongoing weakness and that higher yields in of themselves are positive for spreads,” the strategists wrote. Higher yields have been most negative for equity market sectors that represent a smaller part of the credit market to begin with, they noted.

“That said, as we witnessed a year ago, this large of a divergence between stocks and bonds is unlikely to last forever,” the strategists said.  

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