Bond traders aren't buying the rosy stock outlook

Key points

• As the S&P 500 hovers near record territory, bond spreads are widening
• The spread between the riskiest and safest investment-grade credits is hitting its widest level in nearly 2 months
• Historically, this specific divergence pattern frequently precedes market inflection points, leading to lackluster forward equity returns and an asymmetric risk/reward profile heavily skewed toward drawdowns over the subsequent one-to-two-month window.

Bond traders seem to be a bit skeptical

The S-TCTM Risk Warning Model triggered a new alert on September 28; historically, this suggests that equities may face new or ongoing headwinds in the near term.

Perhaps more troubling is that divergences are also showing up in credit. We've poo-pooed the idea that the bond market is always smarter than the stock market and continue to hold that belief. Still, divergences between the two can hold some information, and we're seeing that now.

In a stark change from the past couple of years, the spread between the riskiest and safest investment-grade credits bottomed about two months ago and is nearing a two-mon