Photo by Luke Michael on Unsplash

U.S. consumer credit expanded $18.9 billion in January while retail sales slid 1.9%.
As in December, consumers are borrowing to cover basic needs and make ends meet as their interest costs are rising. No wonder U.S. consumer sentiment is at a decade low.

As stocks continue through a much-deserved bear market, corporate bonds are, as usual, dropping along for the ride. As bond prices fall, yields on the riskiest CCC issues have risen 333% since July (from 6.6 to 8.8%), while BB issue yields are up 516% (3.1 to 4.7%). We expect yields to widen further as default and liquidity risk are priced back into corporate security prices.

At the start of tightening cycles, it is typical for liquidity to drain out of all asset classes. But as the economic slowdown picks up steam and available cash contracts, default risk becomes the dominant concern. That is when government bonds become the most attractive asset class on offer, and safety-seeking inflows drive up their prices as everything else drops.

I explain this stuff all the time. Sometimes, it’s nice to see others take a stab. Lance makes a solid effort in the clip below. 

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