Recession anxiety? Not in the credit market – The Washington Post

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The corporate debt market is still doing its part to keep America out of recession.

While economists and yield curve indicators warn of a potential slowdown in 2023, signs of any kind of credit panic remain conspicuously absent from primary issue markets and corporate spreads. Inc. is among 19 investment-grade companies that sold bonds this week, ending November at about $104 billion in issuance, according to Bloomberg Intelligence data, in what is usually the one of the last pushes before bankers and investors start checking for the winter holidays.

Those aren’t amazing numbers for this time of year – they’re slightly below November’s average of the previous five seasons – but they’re not bad either. To the extent that emissions are falling, it’s almost entirely because companies don’t want to borrow at those interest rates, not because the market isn’t open to them. The market still hasn’t seen anything resembling the dreaded “buyers’ strike,” which can leave businesses dry in their time of need. Even issuers in the high yield market – which has been frozen – could probably borrow if they wanted to. They just don’t want to do it at 8.5%, and most had the foresight to fund when rates were low in 2021.

In this sense, the corporate bond market is much like the US retail sector and the labor market, two parts of the real economy that have proven surprisingly and enduringly resilient in the face of ubiquitous doomsday predictions. Corporate balance sheets, like household bank accounts, may be deteriorating a bit from their pristine levels at the start of 2022, but both started from extraordinary strength points. All of these things can help delay or even prevent a recession. The resilience may not last forever with the Federal Reserve set to push interest rates to the highest levels since 2007, but there is a chance – perhaps small, some would say – that it could persist just long enough. to keep a soft landing for the economy within the realm of possibility.

In a market that has been yield-starved for most of the past decade and with pervasive uncertainty surrounding the outlook for equities, many investors seem downright eager to hold corporate bonds. In its weekly commentary Monday, analysts at the BlackRock Investment Institute, including global chief investment strategist Wei Lu, said they remain tactically and strategically overweight investment-grade credit on “attractive valuations and upside potential.” revenue”. In a nutshell, things would have to go drastically south from here – credit quality would have to deteriorate significantly or inflation would have to prove much more tenacious than expected – to lose money on US investment-grade bonds, which reached 5.31% at the time of this writing. As my colleague at Bloomberg Intelligence, Noel Hebert, said, all-in yields would need to climb about another 75 basis points just to wipe out coupon income. What are the chances of this happening?

• Option-adjusted spreads on investment grade debt amount to 133 basis points and Hebert does not expect them to exceed 225-250 basis points even in a recession, implying maximum deterioration of around 117 basis points.

• Meanwhile, the median expectation among strategists polled by Bloomberg is that end-2023 10-year Treasury yields will be slightly below current levels; the range of projections is from 2% to 5.4%.

• These estimates could both turn out to be wrong individually, but they are unlikely to be wrong at the same time in the same direction, and they would tend to cancel each other out, 1970s-style stagflation notwithstanding.

There is even an appetite for some of the riskier parts of the business market. Apollo Global Management Inc. has just raised a $2.4 billion fund to buy debt with double-digit yields, private financings and structured credit. Armen Panossian, head of performing credit at Oaktree Capital Management, told Bloomberg TV on Monday that “high-quality, high-yield bonds offer attractive opportunities,” as do parts of the private credit market.

On the contrary, investors seem a bit too eager to pay for corporate credit heading into an uncertain 2023, judging by the current level of spreads. But there is reason for hope if investors remain as optimistic as they appear to be. Recessions are ultimately crises of confidence. Consumers lose confidence and stop buying goods and services, so employers cut costs by laying off workers, who then buy even less. Likewise, investors often lose the confidence to finance companies at a reasonable price, so companies invest less in the kinds of projects that fuel growth. In that sense, the current vote of confidence in the bond markets could turn out to be a self-fulfilling prophecy if the free market helps keep the dream of a soft landing alive.

More from Bloomberg Opinion:

• Powell and the markets talk to each other: Mohamed El-Erian

• The Fed expects nothing less than an economic miracle: Karl W. Smith

• Fed Chief Jawboner lets the data do the talking: Jonathan Levin

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.

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