The S&P 500 is currently down a little over 7% YTD and 11% of the May 2015 high. Unfortunately, all signs coming out of the bond market are signalling a further fall in equity prices.

The spread between AAA rated corporate bonds and the 10-year treasury bond has blown out to 213 basis points over the past couple weeks. This is the widest spread since September 2011, during another period of market turmoil.

Bond Market Equity Prices

The spread between BAA rated corporate bonds and the 10-year treasury bond has widened out to 351 basis points, the widest level since July 2009. While equity prices and this bond spread moved in fairly close lockstep from 2008-2013, this relationship has been diverging since the middle of 2014. The widening of this spread also doesn’t bode well for a turnaround in industrial production anytime soon.

Bond Market Equity Prices

Bond Market Equity Prices

Lastly, the spread between high yield bonds and AAA rated bonds has widened out to 519 basis points, which is the widest level since 2011. There has been a dramatic move in this spread since 2014. The spread narrowed to a 20-year low of just 60 basis points in June 2014. It has since violently widened and diverged from equity prices.

Bond Market Equity Prices

The Bond Market Is Waiting For A Further Correction In Equity Prices by Eric Bush, CFA – Gavekal Capital Blog

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