In January, our Elliott Wave Financial Forecast said “today’s historically slim margin between the yield on high-grade U.S. Treasuries and that on low-grade junk bonds signals an extraordinary complacency. Our forecast is for the yield spread to widen substantially.” That forecast is playing out as expected. Our new April EWFF showed this chart with comments below:
Since [early January], the junk bond spread has decisively broken above a three-year declining trendline. March brought the biggest monthly loss in the Bloomberg US Corporate High Yield Index since October 2023.
As EWFF said about the historically narrow spread, this is “an untenable situation.” A bear market in corporate bond prices will ultimately lead to a liquidity crisis because bond yields, which price the cost of money, are rising.
Widening credit spreads usually precede financial trouble. Already, bankruptcy filings in the U.S. have increased 14.2% in the twelve-month period ending December 31, 2024. The Russell 2000 index of small cap stocks, a sector that is highly sensitive to economic change, is down 22% from its November peak. The Conference Board Consumer Confidence index just dropped to a new four-year low. Get ideas on how to stay financially safe by reviewing our flagship services.
Another resource for tapping into our financial insights is our FREE newsletter. Follow this link to have it sent directly to your inbox.