David Hay — Haymaker Daily: Are the Canaries Getting Woozy?
A macro/credit Daily: the corporate/Treasury spread is still reassuringly tight (investors remain risk-tolerant), but two bond-market "canaries" bear watching — the BB-vs-CCC junk yield gap has surged ~300 bps to ~800 bps (widest since the 2022 dual bear market, nearing a three-year-resistance breakout), and the 30-year Treasury yield looks poised for a multi-year upside range expansion; a spike toward 6% "would be problematic."
One-line take: A macro/credit Daily flagging two bond-market "canaries" — no named securities. The most-watched gauge, the corporate/U.S. Treasury yield spread, is "extremely tight," which is "indicative that investors remain in a risk-tolerant mood." But within junk, the spread between BB-rated (highest-grade junk) and CCC-rated (lowest rung before default) debt has widened to ~800 bps (8%) — a surge of ~300 bps from last summer's tights, the most elevated since 2022 (the worst of the dual stock/bond bear market) and "threatening to break above three-year resistance." Whether that is an early warning "is open for debate," but a second signal deserves monitoring: the 30-year Treasury yield — less critical than the mortgage-driving 10-year, but a "breakout and spike to, say, 6% would be problematic" — "appears to be on the verge of an upside range expansion above multi-year resistance." Haymaker stops short of calling either a breakout yet (a yield breakout = the underlying bond prices breaking down; yields move opposite to prices) and will "keep you informed on how this important situation develops." No tickers are given — so no stock table; this feeds the master credit-spreads / rates macro themes.
1. Talking points
The reassuring signal — corporate/Treasury spread is extremely tight
- A yield spread is the extra yield (premium) a corporate bond pays over a government bond. The corporate/U.S. Treasury spread is "generally considered to be the most important" one.
- Right now it is "extremely tight," which Haymaker reads as "indicative that investors remain in a risk-tolerant mood."
The first canary — the BB-vs-CCC junk gap is surging
- The "potential (if proverbial) canary in the coal mine" is the gap between BB-rated bonds (the highest-grade junk issues) and CCC-rated debt (the lowest rung outside of bonds already in default).
- That spread is "presently around 800 basis points (bps), or 8%, higher for CCC-rated bonds than those rated BB" — a surge of ~300 bps (3%) from last summer's lows (tightest).
Why it matters — widest since the 2022 bear, nearing a breakout
- The BB/CCC gap is "the most elevated since 2022, when a dual bear market in stocks and bonds was at its worst."
- It "is threatening to break above three-year resistance." Whether this proves to be "an early warning signal is open for debate."
The second canary — the 30-year Treasury yield
- A separate "message coming from the bond market that deserves monitoring": the 30-year U.S. Treasury yield. It's "not as critical as is the 10-year T-note yield" — the benchmark "so many private sector borrowing costs, like mortgages, are based on."
- Still, "a breakout and spike to, say, 6% would be problematic," and — like the BB/CCC gap — the long bond "appears to be on the verge of an upside range expansion above multi-year resistance."
The caveat — premature to call a breakout
- "At this point, it is premature to say yields on either market are breaking out." A yield breakout also means "the prices of the underlying bonds are closing to breaking down" — yields move opposite to prices.
- Going forward, Haymaker "will keep you informed on how this important situation develops."
Summary derived from the paid Haymaker newsletter (text in transcript.txt) for personal study. Not investment advice. © Haymaker / David Hay for source material.