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This Does NOT Happen PRE-Recession

CAMS Weekly View from the Corner – Week ending 9/6/2019

September 9, 2019

Today we look at a barometer of economic stress via market participant actions within the bond market.

The bond market has received some mainstream news attention with how low the 10 Year Treasury Interest Rate has fallen.  If you are a consistent reader of these Views you may recognize that instrument as we have chronicled the actions of those falling rates dating back nearly a year now.

The falling of that interest rate has led to an inverted yield curve.  The inversion of the yield curve is what garnered the general media’s attention.  They have been offering said inversion nearly assures a recession.

Inversion of the yield curve is more complicated than that as it is not a one-stop-measure with perfect clarity of near-term economic activity.  This is why we offer many different measures when entertaining the question/observation of whether our economic backdrop remains healthy or not.

Today’s measure is within the corporate sector of the general bond market.  More specifically, we are drilling down into the most vulnerable area which takes on stress quickly when recession is imminent.  These are known as the “Triple C’s” which are bonds that are rated CCC or lower.

These are a far cry from a Triple A rated corporate bond which achieves this rating with a rock solid financial backdrop within you-name-it corporation. Simply put, Triple C’s are an excellent weather vane of near-term economic expectations.

When market participants become concerned of the forward economic backdrop they sell these bonds and in so doing the interest rate on Triple C’s skyrocket upward reflecting the new expected risk of these bonds.


The above chart dates back to the mid-1990’s.  There are two blue vertical bars on the chart which represent recessions.  In both cases the Triple C rates moved upward quickly leading into the recession.  In the case of our last notable recession these rates started to climb quickly in late 2007 which foretold the recession.

Interestingly, in early 2016 rates climbed rapidly which offered tremendous economic concern only to turn back down nearly as fast.  It was a blip of recession concerns that did not materialize.

With all of the above offered we can see to the far right of the chart these Triple C’s are not offering any notable action.  This calmness in Triple C’s does not occur if we are imminently embarking upon a recession.  For our part we continue to monitor this space for any signs of change to its current steadiness.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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