What Junk Bond Spreads Tell Us: Economy OK for Now

A wide gap between high-yield and 10-year Treasury signals a pending recession, says Natixis’ Lavorgna.

What are junk bond yields—specifically the spread between them and 10-year Treasury yields—telling us about the nation’s economic outlook? According to Joseph Lavorgna, chief economist, Americas, for Natixis, it’s bright, for now.

Despite handwringing over a trade war and other clouds on the horizon, the high-yield spread is not sending out a distress signal. Since the late 1980s, when the junk market had developed in earnest (thanks to Michael Milken and that era’s leveraged buyout craze), the junk-Treasury spread has peaked right before the recession hit.

That makes sense: As junk is perhaps the most vulnerable bond class, it stands to reason that investors would dump these issues, pushing down their price and elevating their yield.

But the spread nowadays is a benign 2.26 percentage points, Lavorgna noted in a research paper. That’s almost half of the 4.34-point average of the peak spreads that augured in the recessions from Milken’s time to the 2008-09 cruncher. 

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Spreads reached their zenith in December 1989, at 4.43 points, seven months before the economy peaked and the 1990 recession started. Next, they topped out at 4.68 points in December 2000, three months before the economy hit its ceiling. On the eve of the Great Recession, spreads crested at 3.9 points, a mere one month prior to the economy’s high-water mark.

“Clearly, the lead time has been shrinking,” Lavorgna pointed out.  In other words, when the spread widens, we won’t have much time to brace for the downturn.

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MSCI Nabs Ex-Alaska Permanent Fund CIO

Russell Read will start his new London-based job in September.

Russell Read




Russell Read
, the former Alaska Permanent Fund Corp. chief investment officer, is joining index analytics firm MSCI.

His new job, managing director and global head of client solutions, will based in London. Read will also be a member of MSCI’s executive committee. He will start in September.

Read’s new boss, Laurent Seyer, chief operating officer and chief client officer, said Read’s  experience and prowess in the public and private investment markets would “benefit our clients as we strengthen our capabilities across asset classes.”

During his time with the $65 billion Alaska fund, Read bolstered the corporation’s long-term investment strategies. He also built up its governance structure. Towards the end of his two-year stint, Read launched a $1 billion private equity seeding platform with the UK Railways Pension Scheme and asset manager Wafra Group.

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Read resigned from the Alaskan sovereign wealth fund last week. Marcus Frampton, head of real assets and absolute return, is the current acting CIO as the fund searches for his replacement.

Read was also a former CIO of the $357 billion California Public Employees’ Retirement System, which is also hunting for a new chief.

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