We are in an equity market correction with a decline of 10% from the high. There has been a widening of spreads in credit markets, yet the overall signaling in credit still suggests a stable market. One, credit spreads are off their lows but still below the disruptive period of September 2024 when the Fed believed there was a need to cut rates 50 bps. Two, credit spreads are much lower than the bank crisis period of February 2023 and the period of equity market correction in 2022. Three, spreads are lower than the period of higher inflation post-pandemic.
This may be the beginning of a larger correction which means that investor still have the opportunity to reduce their credit risk. Credit adjustments, short of a crisis, are slow-moving, so there is the threat of being early with portfolio rebalancing, yet given the low level of spreads, pulling duration is an easy way of offering portfolio protection.
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