Credit risk - just as big an issue as equity risk

The credit markets have seen significant outflows from high yield ETF as credit investors have exited for safety. The result is as expected, a significant increase in corporate spreads. While spreads for BBB and high yield are still lower than levels at the beginning of 2019, the concerns over liquidity and flows are significant and should be accounted for in any portfolio adjustment. Liquidity in credit markets are being tested in ways not seen since the Financial Crisis.

The 5-day spread widening for high yield was 27% and just under 16% for BBB. These are the largest weekly increase over the five years shown in the chart. It is the biggest percent change for high yield spreads in a month since 2000. This is the greatest percent change for BBB spreads since the Financial Crisis.

High yield sectors such as energy have been especially hard hit given the sharp decline in oil prices, a 25 dollar decline since the beginning of the year for oil futures. While it seems like BBB have fared better, many investors are dumping marginal names to get ahead of any downgrades. 

The spread widening has been masked because of the declines in underlying Treasury yields. The bond AGG index is still positive for the year, but the difference between it and Treasury indices is off significantly. The negative adjustments in credit markets are real.