Higher US corporate bond yields do not signal recession

The performance of US corporate bonds since the end of November has been poor. For example, the average yield of seasoned issues rated Baa by Moody’s has increased nearly 10bp, extending its gain since last February to around 120bp. It is not surprising that this has sent alarm bells ringing, since an increase in the yield has preceded all seven recessions that have taken place in the past fifty years. The latest increase is also reminiscent of the one that took place ahead of, and during, the 1937/8 recession (which took place around four years after the end of the Great Depression).

Nonetheless, a recession is far from inevitable. Indeed, on three occasions in the past twenty-odd years, a sizeable increase in the speculative-grade corporate bond spread coincided with events that were not followed by economic downturns. These were the LTCM crisis in 1998, US corporate accounting scandals in 2002 and the Greek crisis in 2011. Our view is that the latest increase in this spread – which has been prompted by ongoing concerns about China’s economy and the related weakness of commodity prices – will not be followed by a recession.