Cross market information provides useful information on how markets may behave. The credit spread or risk premium above Treasuries tells us something about the supply and demand for credit sensitive investments as well as the default risk of levered companies. A simple analysis by the Market Compass blog proves the point. When spreads widen by even 25 bps in a 60 day period, the S&P 500 will generate negative returns. Similarly, if there is a tightening of credit spreads, the S&P 500 will have strong positive returns. This tendency is especially strong if the S&P500 index is already trending lower.
The price of credit tells us something about market returns. It makes good intuitive sense that if credit becomes riskier, there will be a fall-out with the residual value of the firm. My guess is that this will be even stronger for small cap firms or those that are highly levered.
The price of credit tells us something about market returns. It makes good intuitive sense that if credit becomes riskier, there will be a fall-out with the residual value of the firm. My guess is that this will be even stronger for small cap firms or those that are highly levered.
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