The risk budgets this month are again unchanged. For the moderate risk investor, the allocation between risk assets and bonds remains at 40/60 versus the benchmark of 60/40. The changes in our indicators since last month’s update have not been sufficient to warrant a change. Credit spreads did narrow significantly over the last month but the widening trend is still intact.

The economic data improved somewhat over the last month and oil prices firmed. This firming of oil prices, more than anything, was the catalyst for the improvement in credit spreads. That improvement in credit spreads was accompanied by a pretty nice rally in stocks but like the trend in spreads, the trend in stocks hasn’t changed, the downtrend threatened but still intact. The improvement in the economic mood also affected the long end of the bond market. Our move last month to sell duration turned out nearly perfect as the update was published the day TLT and TLH peaked.

Credit Spreads

The panic I noted in credit spreads last month abated throughout the month and spreads narrowed significantly. The narrowing, however, was not by my reckoning sufficient to change the trend nor to make a change in allocation. A narrowing like this even before recession is not unusual. As you can see similar moves were seen prior to previous recessions. The economic damage of wider spreads is hard to quantify but high yield issuance is down considerably from last year. So far in 2016, $16.4 billion in junk bonds have been issued versus $51.5 billion in the first two months of last year.