A fight is brewing between two types of debt that serve as guideposts for assets around the world.
On one side, there's the $13 trillion U.S. government debt market, which seems to be sending a steady message that growth is slowing and not picking up anytime soon. On the other is the $1.4 trillion U.S. high-yield bond market, which had been saying that things looked gloomy but reversed course quickly and now sees sunshine and rainbows.
Both markets matter. The government debt sets the benchmark borrowing costs on everything from mortgages to auto loans, while junk bonds have historically been a leading indicator for recessions and stock market selloffs.
But both can't be right at the moment.
Determining the reality between the pessimism of government-debt traders and sudden optimism of credit buyers is difficult, but the edge probably goes to the U.S. government debt market, which has a clearer, more compelling message.
Take a look at the gap between short-dated and longer-dated Treasury yields, which has contracted to the narrowest since about 2008.
That usually happens when economies are cooling off and inflation is slowing. Speculative-grade companies usually have a harder time during economic slowdowns because they are expecting to grow enough to pay back their higher debt loads relative to their incomes.
Yet if you look at the debt of these companies, it's performing surprisingly well. U.S. high-yield bonds are on track for the best monthly return since January 2012, with 2.7 percent gains so far in March. Junk-rated debt of energy companies is on an even bigger tear, gaining a whopping 10.2 percent in less than two weeks, putting March on track for the best rally since 2009.
Suddenly, credit traders are brimming with hope. But have conditions truly improved that much?
The answer is no, not particularly. In fact, by some measures, such as disappointing economic data out of Japan, China and Europe, growth is at risk of slowing even further. Yields on Japanese 30-year bonds have fallen to a record low of 0.5 percent this week. And while U.S. bonds moved independently from the rest of the world once upon a time, global debt markets and economies are increasingly reliant on one another.
The main thing that's changed for corporate-debt investors is that oil prices have stabilized and posted a rally after months of seeming free fall. And for some reason, junk-bond prices have been tied closely to oil values for the past year. This hasn't always been the case, and some argue it doesn't really make sense because energy debt accounts for only about 12 percent of the broader high-yield bond market at this point, based on market value.
Also, commodity prices are incredibly volatile and prone to reversing course suddenly. So they're not the best predictor of the longer-term global economy.
The U.S. economy is probably doing a touch better than the nation's government-debt market is suggesting. But the credit cycle is clearly turning, and more companies will fall victim to unforgiving investors. Riskier debt is going to trip again in the near future, despite the latest rally.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Lisa Abramowicz in New York at firstname.lastname@example.org
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