Article: S&P 500: A strong recovery after the August collapse is a sign of strength
Source: https://ru.investing.com/analysis/article-200314997
Context:
Currently, the market favors bulls, and the long-term bullish trend remains strong. A key factor supporting this trend is the steady demand for debt instruments: the yield on speculative US corporate bonds has reached its lowest level in the last two years.
Bonds support a bullish scenario
Despite fears of a recession, corporate bond yield spreads, which typically increase before and during recessions, do not signal an impending recession.
What is meant - in simple words
The issue of the need for money of the main manufacturing companies in the United States included in the S&P 500 calculation index is now being solved with a bang, due to which, in fact, this index began to grow powerfully.
The premise is that Everyone started buying up their long-term bonds, due to which the demand for these securities in the market began to exceed supply, which means that the yield on them began to decline - why put the percentage of income on them higher when they are already buying up normally (the yield of speculative US corporate bonds reached the lowest level in the last two years year).
About the fact that yield spreads of these debt securities (corporate bonds) usually increase before and during recessions. Why is that?
Corporate bond yield spreads are the difference between the yield of a corporate bond and the yield of a risk-free bond, usually a government treasury bond of the same or similar maturity. This spread reflects the premium that investors demand for the risk associated with investing in corporate bonds compared to risk-free assets.
During economic downturns, it is more likely that companies will not be able to meet their financial obligations. Investors (those who buy their bonds) are beginning to fear that some corporations may face difficulties, which leads to an increase in demand for a risk premium. This translates into an increase in spreads, as investors demand higher returns to compensate for increased risk.
