1. Credit spreads - the dog that’s yet to bark

US High Yield spreads have moved 50bp wider. That's in-line with the re-pricing seen last August during the Yen carry unwind. For comparison the March 2023 SVB collapse prompted a 100bp leg wider in CDX HY; in the Fed's 2022 tightening cycle, HY spreads moved 340bp wider.

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In other words, thus far at least, this move in credit is more akin to a positional deleveraging than a potential financial crisis, monetary policy shock or recession. Moreover, the move in actual spreads has overshot the deterioration in macro fundamentals. 

Qi model value for CDX US HY is now 315bp, 25bp wider from mid-February levels. The market sits 1.4 sigma or 28bp wider still. Finally, note the sharp fall in macro explanatory power which could again speak to the idea this is a positional rather than fundamental move. 

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2. Recession or positional flush?

How else can we measure whether this move is fundamental or a function of positioning? GS VIP basket of Very Important Picks captures popular Hedge Fund longs; their most short basket captures the opposite. 

Qi's model of the RV pair is notable on a few fronts. On Monday, the Fair Value Gap was -2.3 sigma: HF VIP were 11.2% cheap relative to VIP Shorts. It's bounced but still looks like it's moved a long way below where macro fundamentals say the pair "should" be.

Model confidence of 19% is consistent with the idea that macro is not the key driver. Flows - more specifically, deleveraging of consensus positions - trumps macro.

Correlation between the RV's spot price and Qi's FVG is decent suggesting mean reversion potential.

3. Message from the US yield curve

Qi uses the yield curve as a proxy for forward growth expectations. Steeper yield curves reflect reflation; yield curves flatten as economic growth slows and can even invert during recession. 

So, if this equity puke is a recession scare, why has the yield curve steepened?

Stagflation is one answer. For many bond guys, stagflation is an intuitive curve steepening event - growth scares (rate cuts = lower 2y yields) plus sticky inflation (higher yields at the long end).

Qi agrees. Macro-warranted model value has moved from -22bp to +22bp since mid-February. And, if anything, the market isn't steepening to the same degree as macro fundamentals suggest.

It may be that stagflation muddies the signal the bond market provides on where we are in the business cycle. But if the current episode is really going to morph into an economic hard landing, you're probably going to see signs that long bond yields fall even more aggressively from here. 

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