This chart is basically showing a mismatch between two things that usually move together: consumer loan delinquencies (how many people are falling behind on their debt payments) and high-yield corporate bond spreads (how risky investors think junk bonds are). Normally, when households are struggling and delinquency rates rise, markets assume companies will eventually feel it too through weaker sales, slower growth, and more defaults. That usually pushes corporate credit spreads wider. But right now, delinquencies are climbing while HY spreads are still sitting near lows
Why? Markets are swimming in liquidity, investors are desperate for yield and many believe the Fed’s rate cuts will cushion the blow and prevent a major economic downturn. So credit markets are looking calm, even though consumer stress is flashing warning signs. The risk is that this gap doesn’t last forever. If delinquencies keep climbing and start hitting corporate earnings, spreads could widen quickly. Historically, when there’s been this kind of disconnect, it tends to close with credit markets catching up to the stress in household financesIf it doesn’t, and spreads stay tight, it may mean credit markets are no longer as tied to consumer stress as in the past, being driven more by Fed policy and investor flows than by fundamentals. Whether this is a true new normal or just a delayed adjustment is still up in the air, but either way it’s a space to watch.Source: StockMarket.News
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