High Yield Credit Spreads Widen

Early Warning Sign for Junk Bond Market?

The week around Christmas generally sees low trading volumes and low volatility. That’s mostly what we got, although Friday’s action saw some steeper declines than investors may have been prepared for. For the week as a whole, equities produced modest gains with U.S. stocks showing no real preference for growth/value or high beta/low vol. The 10-year Treasury yield briefly touched its highest level since early May. The dollar index moved above the 108 mark for the first time since late 2022.

The move in long bonds during a week of relatively low volatility indicates that the Fed and inflation are still very much on investors’ minds. The Fed Funds futures market is down to pricing in just one rate cut in 2025 and I wouldn’t be at all surprised if Powell and company start considering hikes at some point if inflation continues trending higher. With Trump tariffs and reshoring likely to be major themes in the coming year, the catalysts are certainly there for inflation and yields to keep moving higher.