The US Federal Reserve's efforts to achieve a soft landing in the economy are showing positive signs as declining inflation and expectations of rate cuts lead to improved credit market conditions [f8160bb3]. However, there are indications that the credit cycle may be entering an uncertain phase. Over the past 18 months, there has been an aggressive rate hiking cycle as central banks counteract high inflation [6dd781f9]. US inflation has decelerated, but companies should expect an environment of higher rates for longer [6dd781f9]. Recessions typically follow Fed hiking cycles and mark the end of a credit cycle [6dd781f9]. The US economy remains in the expansionary phase, while the UK and Germany are in the recovery and recessionary phases, respectively [6dd781f9]. Some indicators suggest the first cracks in the credit cycle are appearing, such as a decrease in US job openings per job seeker and an increase in auto and credit card delinquencies [6dd781f9]. Valuations are not reflecting the high interest rate environment, with more than 60% of the high yield market paying a spread of less than 300 basis points [6dd781f9]. Fundamentals are weakening, and defaults are expected to increase, particularly in the leveraged loan market [6dd781f9]. Maturity walls pose risks and opportunities, with US companies potentially struggling to refinance [6dd781f9]. Selectivity is key, and active managers have the flexibility to uncover value in an environment of increasing dispersion [6dd781f9]. Janus Henderson Investors' Credit Risk Monitor indicates that indicators for access to capital markets and cashflow and earnings have both improved [f8160bb3]. Jim Cielinski, Global Head of Fixed Income at Janus Henderson Investors, believes that spreads will tighten in the coming months and that corporate bonds can perform better than just providing coupon or carry [f8160bb3]. While credit fundamentals have weakened slightly, most companies are still able to service their debt [f8160bb3]. Credit conditions have eased, leading to spread tightening, and central banks are expected to cut rates, reducing financing costs [f8160bb3]. The outlook for earnings growth has stabilized, and lower inflation should make bonds a more attractive proposition [f8160bb3]. Both investment-grade and high-yield credit are considered attractive, with individual security and sector selection playing a crucial role in delivering risk-adjusted returns [f8160bb3]. However, caution is advised as the jury is still out on whether credit fundamentals have fully turned the corner, and the possibility of a hard landing remains [f8160bb3].
Credit's strong run stumbled in the first week of this year, according to Credit Weekly [d53cb0c5]. The article discusses the reasons behind this stumble and provides insights into the performance of credit markets. The author of the article is not mentioned. The article is from Bloomberg and was published on June 22, 2024. The content is about the performance of credit markets.