VIX, junk credit and the National Activity Index
This long term weekly chart compares the relationship between:
1) economic fundamentals
2) fears of falling equity prices
3) expected default rates in credit markets
The top half of the chart overlays the long term correlation between the VIX (in orange) to speculative corporate bond yields (blue). The bottom half of this chart shows the Fed's National Activity Index in white.
The Fed's National Activity Index is a weighted average of 85 indicators of growth in national economic activity: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories. It appears the most recent quote on this monthly index lags by as much as 60 days.
The BAML junk B grade bond index currently yields spread of 4.3% over the 10 year treasury yield. The spread is the 'risk premium' investors earn over the risk free treasury rate, and is thought to imply current expectations of the default rate for credit.
The chart history shows how as the economic conditions deteriorate the fears of default can quickly spike.
The VIX index value is calculated from current price of the S&P500 index options. The VIX quote gives a measure of the market's expected annualized change in the S&P 500 index for the next 30 days.
1) economic fundamentals
2) fears of falling equity prices
3) expected default rates in credit markets
The top half of the chart overlays the long term correlation between the VIX (in orange) to speculative corporate bond yields (blue). The bottom half of this chart shows the Fed's National Activity Index in white.
The Fed's National Activity Index is a weighted average of 85 indicators of growth in national economic activity: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories. It appears the most recent quote on this monthly index lags by as much as 60 days.
The BAML junk B grade bond index currently yields spread of 4.3% over the 10 year treasury yield. The spread is the 'risk premium' investors earn over the risk free treasury rate, and is thought to imply current expectations of the default rate for credit.
The chart history shows how as the economic conditions deteriorate the fears of default can quickly spike.
The VIX index value is calculated from current price of the S&P500 index options. The VIX quote gives a measure of the market's expected annualized change in the S&P 500 index for the next 30 days.
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