Credit Market Signals
Look to debt, as equities often lag
Taking a look at the VIX plotted against the BlackRock Corporate High Yield Fund (HYT) tells an interesting story.
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The VIX is often referred to as the "fear gauge" for equities and the high yield debt market is a pretty good measure of overall fear in the credit markets. Since bond prices move inversely to yields and the VIX measures the cost of downside protection for the S&P 500, these instruments should move inversely to one another.
Back in June and July as the equity market pushed to new highs, the HYT began to freefall, indicating that all was not right in the credit markets. The subprime story broke and the VIX jumped, but only after the HYT had begun its fall.
Since then, the HYT and the VIX have moved together, each peaking (up or down) at roughly the same times.
In the past two weeks however, there has been a noticeable divergence. Once again the HYT is falling and the VIX is not moving higher in tandem. The credit market is on edge with the monoline problems and now the ARS failures, while equities are hoping mortgage bailouts and the stimulus package will keep the economy afloat.
Only time will tell, but once again the credit markets may be first to the party, leaving equities to squabble over a tapped keg.
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