Wanted to take another look at this, briefly. Here’s the chart I had from an earlier post that looked at this tantalizing subject (well, for me it is, anyway):
That was a 20 year chart. Let’s take a look at smaller timeframes. First, here’s a chart that shows the two yields moving together through time:
Other than the summer of ’08 where we saw a divergence (timing difference is actually a better term) in rates, these two time series performed quite similarly. So let’s take a look at another chart of the spread:
That black vertical line is the low in the series, and it occurred in October of ’08. Turns out it was 5 months almost to the day before we saw the March lows in stocks from which the market rallied off of. I’m not suggesting this spread is a leading indicator. I haven’t run any statistical tests or anything like that.
But this should serve as a reminder for an equity investor to consider taking some cues from the credit markets. Even looking at things from a capital structure perspective it makes sense. Why? Just look at the capital strucutre. Equity investors are the last to get their money. So if credit markets are showing stress, it should serve as a warning to equity markets to be wary.
The last chart to look at is here:
The blue line represents support that has been in place for over a year. It has been decisively broken and the trend is to head lower. How fast will it head lower and how far remain to be seen.
But I can only imagine what it will take to make this spread widen out again, though.