It’s Goldilocks Time for Corporate Credit
- By John Tierney
- 3 min read
Summary
• The Atlanta Fed GDPNow model may project 3Q GDP falling to 0.5% but we see little risk of credit spreads widening.
• Historically, credit spreads have not been sensitive to fluctuations in quarterly GDP – apart from recessions. The Fed may be starting to unwind easy monetary policy – but it also doesn’t want to cause the next recession.
• The trailing 12-month default rate is 2.6% and Moody’s expects to fall to 1.5%-1.7% during 1H 2022. Credit spreads will remain tight until something happens to change that outlook.
• Credit spreads appear tight relative to the still elevated level of the VIX. Our guess now is that VIX will gradually decline as the economy moves beyond Covid stresses over the coming year
Summary
• The Atlanta Fed GDPNow model may project 3Q GDP falling to 0.5% but we see little risk of credit spreads widening.
• Historically, credit spreads have not been sensitive to fluctuations in quarterly GDP – apart from recessions. The Fed may be starting to unwind easy monetary policy – but it also doesn’t want to cause the next recession.
• The trailing 12-month default rate is 2.6% and Moody’s expects to fall to 1.5%-1.7% during 1H 2022. Credit spreads will remain tight until something happens to change that outlook.
• Credit spreads appear tight relative to the still elevated level of the VIX. Our guess now is that VIX will gradually decline as the economy moves beyond Covid stresses over the coming year
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