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Canaries in the credit coal mines

2022 was one of the worst years in history for Fixed income, particularly in terms of duration. As interest rates spiked, long maturity bonds issued during #zirp were hammered by investors. Credit however, was able to hold decently, as spreads were big enough to compensate for the duration hit. But as the economy absorbs the impact of those #ratehikes, signals are appearing in the market that may point to a deterioration of companies balance sheets. In the chart below, you can see the credit spreads for CCC-rated corporate bonds for U.S. and Europe. For Europe, spreads have widened to crisis levels, approaching 2000 basis points that in the recent past have been a great entry point for credit managers. For the U.S., spreads are lower, and have dettached from Europe significantly, but there is a chance they catch up like they did during 2015. We may be assisting to beggining of the end of the current credit cycle.


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