TLT / HYG – RiskOff vs. RiskOn: Tells you how risky investors/lenders are…
The Chart presented maps the performance of TLT (risk off) vs. HYG (risk on). It is evident that there is currently a risk off move occurring in the markets. When TLT outperforms HYG , this is bearish for equites. On the chart, I inputted vertical lines on the periods where TLT outperforms HYG . When this occurs it usually spells a short term peak in the markets.
TLT is a measure for the safest form of credit: 10Y US Treasury Bills. The yield on these bills is known as the “risk free rate”. Investors looking for a risk averse strategy will put their money in here and gather a humble return. However, when investors are looking to get paid more for the money they are loaning; they look for High Yielding Grade credit otherwise known as, Junk Bonds. This debt has higher risks of default but, are more profitable.
Credit is what makes America great. People/corporations spend, spend, spend borrowed money which, leads to more people having more money in their bank accounts. As lenders becoming more risk averse they lend less and are more prudent with their money. Lenders will gravitate to safer investments that do not risk default. After all, when you borrow; you borrow from your future self.
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