A few years ago, I ditched a purely macro approach to investing, to incorporate a political angle first. I do not regret this decision. I was away last week, and I was catching up with various emails, and all the “macro” investors remain relentlessly bearish. Most no longer manage funds, but I suspect are chomping at the bit to get back into markets once markets stop “acting funny”, and macro works again.
Politically, markets seem to be doing what I would thought they would so. Growth would be good, and government bond yields would rise. The ONLY issue is when do rising government bond yields begin to act as a brake on asset markets. My first guess at when this would be the case, was wildly wrong. Higher JGB yields has had no effect on the S&P 500 (I did mention macro investing doesn’t work anymore - yes?).
What has worked is just looking at corporate spreads. This one is from Bloomberg. Plainly when this widens, equities do bad, and when its low, equities do good. Simple.
What is unsettling is this measure is so at odds at most other measures I look at. Below is the Morningstar leveraged loan index - 100 is good here. Below 100 is not so good. It has been at 95 or so most of 2026.
Leverage loans are mainly used by private equity, so in a rising rate environment, you are right to be cautious. But even in the still relatively unleveraged balance sheets of tech, CDS have been selling off. How does this not feed into corporate credit spreads?
But what is really bugging me is a sudden rise in the KDP High Yield daily. It has risen from a low of 5.4% to 6.5% this year - with a spike this month. Usually when this goes up, equities go down.
I normally look at this as a spread to the 5 year treasury. And to be fair the spread is tight - but I still find markets tend to be weaker when this spread goes up - not at all time highs.
I must say I thought markets were headed for a bit of credit driven weakness - especially when I see HYG trading down through its 200MDA.
So credit says that US equities should not be doing so well. Interesting. I also note that S&P Dividend Futures have also not confirmed the break out in the S&P 500. If the dividend future was falling, and S&P 500 going up, that would be a VERY bad sign. At the moment it is just not confirming.
I also note that the GS High Beta Momentum Short Index has been breaking higher. This tends to happen before market problems. Why? When you crush short sellers, you force them to buy back shorts - which is a one time trade. Once they cover, its bombs away!
Basically, both equities and credit are sending mixed signals. My best guess is that everyone has learnt to “buy the dip”. See leverage ETF flows.
I thought the time to worry about rising government bond yields was when gold started to outperform S&P 500. This happened in 2025, but has had a huge reversal this year. One wonders if this is turning again?
All is really adding up to a bearish outlook again. Maybe the macro guys won’t look like idiots for a month or two. Lets see.
