Some credit market and US dollar observations; IMF data released today

Let’s keep things in perspective

I wanted to pass along some charts to show that while much of the mainstream and alt-financial media are proclaiming impending calamity and US Federal Reserve mismanagement (or worse), we need to keep things in perspective. If the world falls apart, the US Federal Reserve will have to shoulder much of the blame. Since the world is not yet ready for a global currency, the dollar-based system will need to suffice for the indefinite future.

Moreover, despite what many are saying, I still have to conclude that the domestic economy is functionally fine as the economic data continue to point to an economic environment that is moving forward. It seems the US Fed is hoping to unwind as much of its stimulus while it can, so that it has ammunition for the next downturn.

Let’s take a look at a couple bond market yield spreads.  While spreads could definitely continue to widen, when viewed through a longer-term lens, the gaps are more tame. Let’s take a look at junk bonds first.

This chart shows the spread between the High Yield Master II OAS index of bonds that are below investment grade (those rated BB or below) and a spot Treasury curve.
The same as above, but only through a five-year horizon

Let’s take a look at investment-grade yield spreads.

This chart shows the spread between the Corporate Master OAS index of bonds that are considered investment grade (those rated BBB or better) and a spot Treasury curve. Five year horizon.

As we can see, the spreads on corporate bonds and US Treasurys have widened, but have not deviated too far from historic ranges. We must consider that there is rot in the bond market and this is to be expected as the world enjoyed seven years of free money. The central banks are now attempting to rein in their easy money.

Traders and investors are bullish the US dollar. Is this the right strategy?

There are a number of issues going on with the US dollar. While there is still no replacement for the greenback, this doesn’t mean that it cannot fall in value.

The US dollar remains elevated, but will it remain that way? The dollar fell last decade as the Fed raised rates.

Nonetheless, the dollar can continue to hold up, especially if the economies of the other developed nations falter. The US is further along the monetary tightening timeline than the other nations and this is testament to the dollar’s importance in global trade. Let’s take a look at the IMF’s own data, updated today, that shows the US dollar’s role as a currency reserve.


The US dollar’s share of global reserves has fallen over the past few quarters, but when taken over a longer time frame, the changes seems more subtle.

The percentage has fallen, but the US dollar still is by far the most important currency. But given all the recent turbulence that seems specific to the US monetary system, I will continue to closely monitor these trends to make certain that they do not accelerate against the dollar. The manufactured crisis between President Trump and the Fed, the higher probability of an uneven credit market unwind, the Fed’s tightening policy in the face of asset price weakness, the recent drop in dollar-denominated asset prices, and the tariff situation can all weigh on the dollar going forward.