Rising recessionary concerns are seeing some investors reduce risk in their credit exposure as they brace for an economic slowdown whose magnitude remains highly uncertain.
High-yield spreads hit a two-year peak of about 600 basis points earlier this month. The Fed has never hiked rates with such tight credit conditions, BofA strategists said, noting that during both the 2001-2 dot-com collapse and the 2008 financial crisis, the Fed was cutting rates.
For Jonathan Duensing, head of fixed income, U.S. portfolio manager at Amundi U.S. asset management, credit spreads point to an economic slowdown, although not a severe one, but they could widen further. "What's unusual about this slowdown ... is that there are shock absorbers suggesting that it might not be a very deep slowdown if it happens," said Viktor Hjort, global head of credit strategy & desk analysts at BNP Paribas, referring to factors such as companies being in good financial health as they come out of the COVID-19 pandemic.
A combination of higher interest rates and economic contraction could lead to more defaults among U.S. companies, and an adjustment of investor positions which would, in its turn, hamper companies' access to the debt markets.
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