While the market might be experiencing some jitters, one analyst is dismissing recession fears. Nick Colas, co-founder of Datatrek, points to a key indicator – corporate bond spreads – as evidence that the U.S. economy isn’t headed for a downturn.
Colas notes that although corporate bond spreads have moved slightly off their 2024 lows, they remain lower than they were at the beginning of the year and throughout 2023. He emphasizes that if investors were truly worried about a recession, these spreads would be widening significantly, reflecting increased risk aversion.
Data from the Federal Reserve Bank of St. Louis reveals that the option adjusted spread (OAS) for high-yield corporate bonds has held steady at 99 basis points since September 4th. This spread measures the extra yield investors demand for taking on the riskier proposition of investing in high-yield, or ‘junk,’ bonds compared to the relatively risk-free U.S. Treasuries. This stability suggests investors are not currently demanding higher returns to compensate for a perceived increase in recession risk.
Further bolstering the positive outlook, Colas highlights the Atlanta Fed’s GDPNow model. This model continues to project solid economic growth for the third quarter, currently estimating a 2.5% increase in gross domestic product (GDP). Notably, the model has consistently predicted 2% GDP growth or better since the beginning of the quarter.
This optimistic economic outlook comes despite a recent drop in the S&P 500, which experienced a 4.1% decline last week. However, the market has since rebounded, suggesting that investor confidence might be returning.
Overall, the combination of stable corporate bond spreads and positive GDP growth projections seems to suggest that a recession may not be on the horizon, at least according to this analyst’s interpretation of these key indicators.
