Credit markets - If the funding is tough, the spreads are wider

Credit markets are all at elevated spread levels versus the pre-pandemic period; nevertheless, the spreads are still less than the March liquidity shock. We are not at pandemic levels but certainly higher than the lows when rates were near the bottom of the cycle and liquidity was flowing. What is important is the relative spreads across ratings. Investment grade spreads have moved higher, well over a 50% increase from the lows last year, but the absolute change is spreads have been modest, so the price impact has also been constrained as measured by the spread times duration. For CCC-rated bonds, the spread increase has been substantial with a strong price impact. 

Equity prices have fallen which indicates firm values have declined, but the real problem is higher rates from the Fed and any constraints on credit. The cost of refinancing has surged, so highly levered firms will see more cash flow go to paying bondholders when debt is rolled forward. A problem also exists if fixed rate debt was swapped to floating. Financing costs are going up which means there is less cash to invest in the business. Default risks are rising, and spreads are doing the same. It is not a good time to be an existing high yield holder until rates start to stabilize.