The US corporate junk bond yield market has always been a leading indicator of troubles to come in other capital markets, including US stock market performance. Besides the necessity of the revival of the overnight repurchase agreement by the US Central Bank to inject emergency liquidity into the US banking system raising massive red flags, US corporate junk bond yields have just recently broken higher above its downward trend for the entire year. Risk in capital markets often first manifests in the junk bond yields, meaning that this indicator is a leading indicator of problems that will manifest in US stock markets as well within a very tight frame of a couple of months or so.
Consequently, keep an eye on this chart, and if US corporate junk bond yields do not reverse below the downward trend line, and keep creeping higher and stay firmly above its breakout point I’ve circled in the chart below, then more declines in US stock markets can be expected in the imminent future with a return of volatility in US stock market performance with a vengeance.
The above break out would be a risk-on event for future US stock market performance, whereas if yields were to drop back below the red line above, this would indicate a risk-off event. Consequently, keep an eye on the above yields in the days and weeks ahead for a better understanding of the risk inherent in the US stock market. In addition, most recently, the New York branch of the US Central Bank announced that they would be extending their overnight repo program to 4 November, making at least $75B of liquidity available to US banks suffering from cash shortages. One should track these daily amounts over the next month and discover if the daily overnight repo market remained at $75B per day, or if levels ever greatly exceeded this amount, as the size of the overnight repo market will also provide some further insight into the stresses of the US banking system being hidden from the public at the current time.
