On the link between US economic, equity and credit cycles

An increase in Moody’s seasoned Baa-rated US corporate bond yield preceded all seven recessions that have taken place in the US in the past fifty years. What’s more, in six of those cases, the increase in the yield preceded a decline in the stock market that typically occurred shortly before the start of the economic downturn. It is therefore not surprising that the 120bp-odd increase in the yield since February last year has sent alarm bells ringing. Nonetheless, increases in corporate bond yields have not always been followed by recessions. We think this is one of those times.