Corporate spreads are rising even with some strengthening in the economy and better liquidity conditions generated by the Fed. Investors are still buying bonds, but the combination of declining quality of supply and choosier buyer demand is leading to more spread dispersion. All bonds in a given rating category are not the same.
It is noted that default rates increase if there is a yield curve inversion. This could be related to higher probability of a recession, but we should expect higher defaults down in quality of recession risks increase.
It is noted that default rates increase if there is a yield curve inversion. This could be related to higher probability of a recession, but we should expect higher defaults down in quality of recession risks increase.
The deterioration in supply quality is worse than seen before the Financial Crisis. The percentage of B- or below for industry sectors has increased and the overall percentage of lowest ratings outstanding has almost doubled. There is also a change in the composition of risk with a clear increase in the high tech sector.
Leveraged loans are a problem with an explosion of downgrades versus upgrades. The market is at the highest level in a decade.
The lower quality firms are the firms that are borrowing the money in an attempt to avoid financial ruin. The issuance of levered loans with debt multiples greater than five has exploded. This makes the debt markets all the more sensitive to any increase in yields.
Borrowing is focused on lower quality higher risk debt. Reaching for yield now requires buying poorer new issuers. This supply and demand story is showing up in the increasing BB versus BBB spreads, (see Corporate spreads opportunities - Spikes and reversals). Whether slower economic growth, rising yields, or declining earnings, credit markets are more sensitive to downside fundamentals.
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