What credit markets are telling us now

Hyman Minsky explained that it is the availability of credit that drives business cycles. If businesses are able to easily borrow they will expand, if the availability of credit dries up they will contract. The US high yield market, via the Merrill Lynch US High Yield Master II, is the easiest indicator to track. In June 2014 the margin over treasuries was 3.36%, this is now at 7.46%. For the lowest quality borrowers, those rated B- or lower, debt may not be available at any price. When new debt was freely available, US oil and gas companies ramped up capital expenditure and increased production followed shortly thereafter. Wages boomed and demand for supporting services jumped as well. Now that the availability of new debt has been shut-off to all but the highest quality borrowers in this sector jobs are being lost and equipment is being idled.