Otavio (Tavi) Costa:
“Corporate bonds now yield only 0.12% above the Fed Funds rate.
The lowest level since 2007, preceding the Global Financial Crisis.
Every time credit spreads were at historically suppressed levels, a hard-landing scenario followed.
Perhaps this time is indeed different, but I would rather base my perspective on numerous indicators pointing towards an impending severe recession.
The profound issue of yield curve inversions is yet another example.
Recently, over 90% of the Treasury curve was inverted, a measure that has accurately predicted every major economic contraction in the last 50 years.
Moreover, the Fed’s policy stance should also be taken into consideration.
As we have learned repeatedly throughout history, tightening monetary policies work with a lag and we are yet to witness a significant credit contraction that could lead to further economic issues.
Even the apparent strength of the labor market should be taken with a grain of caution.
Historically low unemployment rates have served as one of the most reliable contrarian indicators in history.
Either these macro indicators are on the brink of being proven wrong, or the overall equity valuations are entirely out of line.”
Corporate bonds now yield only 0.12% above the Fed Funds rate.
The lowest level since 2007, preceding the Global Financial Crisis.
⁰Every time credit spreads were at historically suppressed levels, a hard-landing scenario followed. ⁰⁰Perhaps this time is indeed different,… pic.twitter.com/fCwm7uXRaN— Otavio (Tavi) Costa (@TaviCosta) July 31, 2023