Recent analysis from S&P Global Ratings indicates potential signs of a credit bubble forming in the US, as corporate bond spreads tighten significantly. As of November 18, 2024, investment-grade spreads have narrowed to 78 basis points, the lowest level since 1998, while high-yield spreads have increased to 266 basis points. This trend raises concerns among analysts, including Nick Kraemer, who highlight the aggressive pricing strategies in the current market environment. [bac97fbb]
The tightening of spreads occurs amidst elevated interest rates that have persisted for over two years, leading to a cautious outlook on the sustainability of these trends. Interestingly, since the Federal Reserve's rate-hike cycle began in 2022, there have been more credit upgrades than downgrades, suggesting a temporary resilience in corporate earnings. However, the potential impact of President-elect Donald Trump's proposed tariff plans on inflation and interest rates could further complicate the economic landscape. [bac97fbb]
In the context of emerging markets, Alan Siow, Co-Head of Emerging Market Corporate Debt at Ninety One, has previously emphasized the need to reassess outdated views on these markets. He noted that major economies, including the US, are grappling with persistent inflation and fiscal deficits, prompting a reevaluation of investment strategies. Major elections in countries like India, South Africa, and Mexico have also demonstrated stable democratic processes, contributing to a more favorable outlook for emerging markets. [acc8ede2]
Investment-grade and high-yield credit spreads in the US and Europe are trading at historically tight levels, while emerging market corporate credit spreads remain within their long-term averages. Siddharth Dahiya, head of emerging market corporate debt at abrdn, expressed optimism about the fundamentals for EM credit, particularly in Latin America, where companies have strengthened their financial positions. However, he cautioned that the credit rating of Latin American companies is often constrained by their sovereign ratings. [a0814427]
Despite the tight spreads in the US credit market, Dahiya believes that as global inflation cools, emerging market central banks will have the opportunity to cut interest rates, which could positively impact local currencies. [08687d14]
The uncertainty surrounding the near-term economic outlook has inflated corporate credit risk for domestically focused firms as spreads tighten. Adam Whiteley, portfolio manager of the BNY Mellon Global Credit fund, noted that the credit risk of more economically sensitive firms, particularly in the US, has been amplified due to ongoing regional issues. He also mentioned that absolute yields on US corporate bonds remain attractive as the health of the US economy appears to be advancing well. [08687d14]