The bond market is signaling that the economy is not going to enter a recession anytime soon, according to DataTrek.
That’s because corporate bond yield spreads relative to Treasuries are continuing to decline.
“The corporate bond market is not discounting any real possibility of a deep 2023-2024 earnings recession,” DataTrek said.
Underlying strength in the bond market is signaling that the US economy is not on the verge of entering a recession anytime soon, according to a Monday note from DataTrek Research.
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In fact, corporate bond-yield spreads relative to US Treasuries suggest the economy is not going to enter a recession in 2023 or 2024, according to the note.
But according to DataTrek co-founder Nicholas Colas, “the corporate bond market is not discounting any real possibility of a deep 2023-2024 earnings/economic recession.”
The spread between corporate bond yields and US Treasuries, which are considered safe assets, helps measure the risk appetite of bond investors.
They typically surge during risk-off environments that suggest economic pain ahead. In other words, investors want to be compensated more for taking on risk during periods of high uncertainty.
“When markets are uncertain about future cash flows, spreads increase to compensate investors for that risk. When markets grow more comfortable that earnings are stable or even increasing, spreads tend to decline,” Colas explained.
Over the past few months, the bond-yield spreads have been declining to levels that are below the average seen from 2015 to 2019, a period of relative calmness in the broader economy.
The current spread for corporate bonds relative to US Treasuries is 1.21 points, and for high-yield bonds relative to US Treasuries it’s 3.94 points. Meanwhile, the average for both spreads from 2015 to 2019 was 1.33 points and 4.56 points, respectively.
“That pre-pandemic 5-year period had its share of recession concerns but also saw long stretches of very low corporate bond spreads. Today’s spreads are just slightly below the 2015-2019 averages, which says the corporate debt markets is no more worried about a sudden decline in corporate earnings than it was in a period of relative financial and economic stability,” Colas said.
The 12 best cities to weather a housing-market downturn when a recession strikes
The economy is reeling amid fears of an upcoming recession.
As mortgage rates rise and uncertainty spreads, home prices have declined across the country.
Home value downturns will escalate in the trendiest hotspots, while other markets will show more resilience.
“If the U.S. does enter a recession, we’re unlikely to see a housing-market crash like in the Great Recession because the factors affecting the economy are different,” Sheharyar Bokhari, a senior economist at Redfin, said in a housing report. “But a recession — or even a continued economic downturn that doesn’t reach recession levels — would impact some local housing markets more than others.”
Redfin researchers looked at several indicators to rank cities on their chances of a housing market downturn in the case of a US recession. The fear, in this case, is that as the broader economy tightens, some home values may decline leaving homeowners holding a mortgage for more than the value of their investment.
Bokhari says it’s most likely to happen in popular migration destinations as demand from relocators and second-home seekers tends to fall during an economic downturn — a trend that has already begun. According to Redfin, demand for vacation homes has already fallen significantly following last year’s pandemic-driven boom.
“As monthly mortgage payments skyrocket, buyers are quicker to back away from second homes than primary homes,” Taylor Marr, deputy chief economist at Redfin, said in a statement. This opens up the market for buyers that remain and leaves them room to negotiate lower prices.
With buyer demand waning, Redfin’s data shows cities with rapidly rising home prices are more at risk of downturn. However, less trendy and more affordable markets — mostly those in the Rust Belt region — remain resilient. This could mean real estate investments in these areas stand a better chance of weathering a housing slump if the US enters a recession.
12. Chicago, Illinois
Price growth in 2021, year-over-year: 11.7%Average home loan to value ratio: 86%The percent of homes flipped in 2021: 1.8%
11. Columbus, Ohio
Price growth in 2021, year-over-year: 13.5%Average home loan to value ratio: 85%The percent of homes flipped in 2021: 3.4%
10. Rochester, New York
Price growth in 2021, year-over-year: 12.6%Average home loan to value ratio: 85%The percent of homes flipped in 2021: 2%
9. Kansas City, Missouri
Price growth in 2021, year-over-year: 10.9%Homes flipped: There are currently 51 fixer upper homes for sale in El Paso.
8. Buffalo, New York
Price growth in 2021, year-over-year: 17%Average home loan to value ratio: 86%The percent of homes flipped in 2021: 2.6%
7. Boston, Massachusetts
Price growth in 2021, year-over-year: 12.2%Average home loan to value ratio: 79%The percent of homes flipped in 2021: 1.2%
6. Cincinnati, Ohio
Price growth in 2021, year-over-year: 13.9%Average home loan to value ratio: 87%The percent of homes flipped in 2021: 3.9%
5. Cleveland, Ohio
Price growth in 2021, year-over-year: 9.5%Average home loan to value ratio: 86%The percent of homes flipped in 2021: 2.5%
4. El Paso, Texas
Price growth in 2021, year-over-year: 13.9%Homes flipped: There are currently 107 fixer upper homes for sale in El Paso.
3. Montgomery County, Pennsylvania
Price growth in 2021, year-over-year: 11%Average home loan to value ratio: 83%The percent of homes flipped in 2021: 1.8%
2. Philadelphia, Pennsylvania
Price growth in 2021, year-over-year: 10.1%Average home loan to value ratio: 86%The percent of homes flipped in 2021: 2%
1. Akron, Ohio
Price growth in 2021, year-over-year: 7.9%Average home loan to value ratio: 87%The percent of homes flipped in 2021: 2.7%
