24 June 2022 Credit

Why Is the High Yield Market Not Blowing Up?

Summary

Many investors seem mystified that high yield credit spreads have not widened more given the steep bear equity market.
So far, there are few signs of stress in the corporate credit markets. Most companies have refinanced into low-rate debt and extended maturities. And the energy sector is not coming off a big investment binge, which has led to high defaults in a downturn in the past.
Wider spreads to date have been due more to high equity volatility than credit risk per se.

High yield is hardly a safe harbour in these challenging times. Given the prospect of higher rates and a possible recession, risks are weighted toward rising defaults and wider spreads.
Barring some major crisis, any credit cycle could be relatively mild, and the opportunity to buy cheap bonds could be short.

Many investors seem mystified that high yield credit spreads have not widened more given the steep bear equity market.
So far, there are few signs of stress in the corporate credit markets. Most companies have refinanced into low-rate debt and extended maturities. And the energy sector is not coming off a big investment binge, which has led to high defaults in a downturn in the past.
Wider spreads to date have been due more to high equity volatility than credit risk per se.

High yield is hardly a safe harbour in these challenging times. Given the prospect of higher rates and a possible recession, risks are weighted toward rising defaults and wider spreads.
Barring some major crisis, any credit cycle could be relatively mild, and the opportunity to buy cheap bonds could be short.