Tightening High Yield Credit Spreads

1.) GLOBAL M2 – While there isn’t an “official” metric for global money supply, there is a proxy we use to estimate what it's doing. M2 is important because it is a monetary aggregate that measures relatively liquid money in an economy—“liquid” being the key. The more liquidity in the system, the better for risk assets. And right now, global money supply is rising at the fastest pace since 2021. Remember too that oil does not "cause" persistent inflation; money supply and the velocity of money do. Velocity is just the speed at which that money moves through the economy—is it getting spent or saved? If money supply were flat, more units of currency going to oil would mean fewer units to other goods and services.

2.) CREDIT – I’ve written in the past about the importance of financials in any bull market. Moreover, when regional banks are performing well, it’s further confirmation that things are still okay. Right now, regional banks continue to move higher, feeding positively on improving credit signals. High-yield credit spreads are the extra yield (difference in interest rate) that investors demand for holding high-yield or "junk" bonds — which are riskier corporate bonds with lower credit ratings — compared to safer benchmark bonds like U.S. Treasuries of similar maturity. Wider spreads indicate higher perceived risk; tighter spreads indicate lower perceived risk. As you can see below, high-yield spreads are tightening.

3.) CTAs – As mentioned, CTAs are big money movers in the system. They can affect the “flows,” which ebb and flow on a daily basis, sometimes increasing and sometimes decreasing… risk on, risk off. We continue to track what CTAs have done and are expected to do. Currently, Goldman Sachs estimates that CTAs bought $44bn of US equities last week and $84bn globally. Over the next week, they estimate CTAs will continue to buy US and global equities in every scenario—up, down, or flat tape. The chart below shows global flow estimates on the bottom left and US flows on the bottom right, over the next week and month. On the whole, these are positive signals, but not as powerful as we saw at the beginning of this month.