It's time to start paying attention to the stock market's 'biggest risk'
- Credit spread is the difference between yields with the same maturities and varying quality.
- The credit spread has widened over recent weeks.
- A widening credit spread is the "biggest risk" to the stock market, according to one analyst.
Tightening credit conditions could mean bad news for the stock market.The credit spread, which is basically the difference between yields with the same maturities but varying quality, is widening. The 10-year Treasury yield has fallen since last month and the 10-year BBB corporate bond yield has been on a slight climb. Advertisement
And while its not at worrying levels yet, investors should be on the lookout - CLSA investment strategist Damien Kestel sees it as the "biggest risk" to the stock market.
That's partly because a large gap between the two yields can signal that credit conditions, which are widely seen as an indicator of risk appetite, are tightening. And with more hawkish monetary policy on deck, those conditions could get worse."The continuation of quantitative tightening in America, along with the projected Fed rate hikes, represents the biggest risk to still presumably Wall Street-correlated world stock markets," Kestel added. "Credit spreads should now be watched closely."
That could very well happen, according to analysts at Morgan Stanley, based on increased funding stresses, weaker trading liquidity and higher volatility.
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