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Chart of the day: Why this is one of the most important charts in the world

From 2008, global central banks, led by the Federal Reserve, incentivised global corporations to issue debt – they made it incredibly cheap to do so and made it clear they were there to support should times get tough.

Investment grade credit (BBB rated)
BBB chart
"Source: Bloomberg"

Global corporations didn’t need to be told twice, amassing trillions of dollars of debt, predominantly with the idea of buying back equity, reducing shares outstanding, and in turn, boosting stock prices.

Now, debt is fine until economics becomes shaky. When economics are deteriorating, such as is the case we see unfolding, corporate debt levels get far more attention, as the risk that the ratings agencies (such as S&P or Moody’s) see greater credit risk increases significantly, suggesting a higher chance the issuers (of the debt) will have a harder time repaying the loans. We see that stress resonating in the many credit market indices, where we look at the yield credit commands over risk-free rates, such as US Treasury’s. In this chart, we see high yield credit vs US Treasury’s (blue) and BBB-rated credit over US Treasury’s (white).

With the world seeing clear signs of an economic slowdown we watch for signs of stress in the credit markets. If spreads widen, it will highlight that the economy is becoming more of a systemic issue and will impact equities far more intently. In credit we trust and is our best guide for those looking at equity indices.

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