This page has been archived and commenting is disabled.
Goldman Warns IG Credit Collapse Signals S&P 500 Notably Overvalued
The sell-off in credit over the past week has led many investors to ask what it means for equities. Credit spread widening usually has negative implications for equity but as Goldman notes, it is critical to estimate the degree to which the equity market has already priced the weakness to determine the potential risks to equity going forward. Interestingly, Goldman finds the weakness in high yield credit was foreshadowed by weakness in the equities of high yield companies (like for like), but the weakness in Investment Grade credit spreads relative to their corresponding equities represents a new divergence suggesting meaningful downside for S&P 500 investors.
HY credit weakness has caught up with HY equity weakness
Goldman's analysis shows that the weakness in high yield credit was foreshadowed by weakness in the equities of high yield companies. This month’s 80bp widening in the CDX HY 5Y to 514bps was extreme relative to history; however, Exhibit 1 shows this move can be more than explained by the 25% decline in their corresponding equities (GSCBHY25) since April 1 and the large dislocation that had developed.
But.. There is reason for concern: A new dislocation in IG credit/equity
The weakness in Investment Grade credit spreads relative to their corresponding equities (GSCBIG25) represents a new divergence we are monitoring closely. In Exhibit 3, we show that after trading in line with each other for months, IG equities have outperformed IG credit by 4% over the past two weeks. This represents a 1.3 standard deviation divergence relative to the past five years. Due to the substantial overlap between names in the IG index and the S&P 500, we see this overvaluation in IG equity vs credit as meaningful for S&P 500 equity investors.
Finally, Goldman note that the cost of protection (on an apples to apples basis) is modestly higher in equity than it is in credit markets out to around 5 years...
Though as practitioners, we note 1) the 55% OTM is not entirely fungible with CDS payoffs, and 2) there is an exogenous desire for systemic risk reduction in S&P 500 puts (as we detailed here)...
New research suggests the divergence is a consequence of financial institutions hoarding insurance against declines in stocks.
Source: Goldman Sachs
- 11 reads
- Printer-friendly version
- Send to friend
- advertisements -






Festivus is here.
*Critical Mass!*
"I'm giv'in all she's got cap'pin. She can't take much more! She's ready to blow!" - Scotty
"Goldman warns" ... so... bullish then....
Soooo...., BTFD hand over fist then.
something everyone around here has been acutely aware of....
mind the rug...
That rug really tied the room together, man.
Until Woo peed on it...
...or it gets yanked out from underneath you.
He tore our carpet.
that means sell your ig to the squid
Are joo surprised by this?
Stocks are more overvalued than the cubic zirconia on Lloyd Blankfein's twelfth fake breasted whore.
so who can distiguish between Investment Grade and Junk?
I see no difference myself. It's all a big f'n high risk market, and the yields ain't worth it. f'em all.
Was the SnP 'Notably Overvalued' before or after the UP moves today?
Not a chance! way more freee money to come.Obummer is not done fucking the sheeple.
Selling of these overvalued puts is going to make the market fly.
Companies have been using free borrowed money for stock buybacks that support their equity price.
Take away the free credit and you take away future stock buyback orgies.
One more step on the long road back to financial reality.
Maybe. Where is the point at which the stock buyback becomes "too expensive"?
even a 0.25%, a company could buy fucking treasuries and still be fucking "profittable."
that is the question, I plenty of room for business as usual when you are already sitting on fucking zero.
I think the point at which financed stock buybacks become too expensive is when a continuation of rates can no longer be counted upon.
The primary reason for such activities is to mask the hidden (to the public) real condition of business. Yet conditions are in fact steadily deteriorating, which shrinks the true revenue available for debt servicing even the existing pile of bonds.