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Credit cycle nuances

The current credit cycle has been special. First, it was born after thr Fed applied zero interest rates to the economy; corporations had the opportunity of a life time to issue cheap debt with long durations, and they took it. Second, as the Fed was tightening, the cost of debt went up abruptly but the need to issue debt was low, which has resulted in a lot of money looking for yields, and few paper available. As a result, spreads have tightened substantially, both in high yield and investment grade, and it has made this cycle longer than expected. But as you can see in the chart below, there is a causation relationship between credit spreads and Fed funds: typically, as the Fed tightens, spreads tighten just to explode and give birth to the new credit cycle. We are at that juncture now. And perhaps that will be the catalyst for lower rates as well.

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