Numerous people have asked for an update to Corporate Bond Spreads Key To Continued S&P Rally.



Specifically, inquiring minds are interested in my statement "It will pay to keep one eye on the credit markets to help ascertain long-term equity direction. In August of 2007 the corporate bond market cracked wide open. Although the S&P 500 made a new high in November, the corporate bond market didn't. It was the mother of all warning calls that most missed."



Here are some charts that show what I mean.



S&P 500 vs. BAA Corporate Bonds vs. 10-Year Treasuries







click on chart for sharper image



The above charts shows that BAA corporate bond yields (one step above junk) were rising throughout 2008 and started soaring right before the stock market waterfall plunge. The 2009 rally started in March with the BAA yield dropping and the 10-year treasury yield rising.



A falling BAA-10YR spread is a measure of increased willingness for market participants to take on risk as the following chart shows.







click on chart for sharper image



The above charts courtesy of Chris Puplava. Annotations by me. Rising BAA to 10-year treasury yield spreads starting August 2007 was a big warning sign.



Not many have access to a Bloomberg terminal that produced those charts but here is something that everyone can easily watch.



HYG - High Yield Bond Fund vs. S&P 500 SPY







click on chart for sharper image



HYG - High Yield Bond Fund vs. S&P 500 SPY



Here is a closeup detail for 2009.







click on chart for sharper image



Junk Bond Default Rate Worst Since Great Depression



Last week the junk bond default rate hit 10.2 percent.



The U.S. junk bond default rate rose to 10.2 percent in August from 9.4 percent in July as the worst recession since the 1930s left more companies unable to pay off debt, Standard & Poor's data showed on Thursday.



The default rate is expected to rise to 13.9 percent by July 2010 and could reach as high as 18 percent if economic conditions are worse than expected, S&P said in a statement.



Default rates have surged from less than 1 percent in 2007 as an economic downturn squeezed corporate revenues and a global credit crunch dried up funding. A 13.9 percent default rate would be the highest since the Great Depression of the 1930s, when it hit 15.9 percent.



Eighteen companies defaulted in August, bringing the year-to-date total to 147. "Credit metrics in the U.S. show continued deterioration of credit quality and restricted lending conditions," S&P said.

Treasury Yield Curve