What caused the recent spread widening?

In short, it was a massive amount of Treasury issuance stemming from a huge defense spending increase and a large short-fall in corporate tax revenue.

Although there are a few reasons why corporate bond spreads widen - a central one is Treasury issuance.  This large issuance corresponded with a fall in equity prices which led dealers to dramatically increase their holdings of Treasuries.  As issuance normalized and net positions wane in the coming months - so too should corporate bond spreads.  This is of course unless expectations as reflected in the ISM continue to deteriorate, in which case further spread widening is guaranteed.



Perhaps I haven't convinced you. Well there are two longer-term charts:




This all apart of my upcoming working paper "Quantity-Expectations Parity: A Primer". I explain how to derive things like:




Most of the data in this post is available through the data download section of the blog!


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