Dodge the bullet

The credit market is trying to remain calm after the bankruptcy of Tricolor Auto and First Brands. Banks, particularly the regionals, which are part of the chain in the loan market, financing the financiers of some of these loans, had been quietly taking money form the Fed to adjust their liquidity requirements, and have, for the moment, dodged the bullet. The leverage loan market (please see chart below), the floating rate brother of the High Yield market, is showing some signs of stress, with a drawdown that can be interpreted as an isolated event, or as the beginning of the deterioration in the conditions of the credit market. Spreads in CCC bonds have widen a little, still not enough to be a concern, but enough to show investors are not numb to these events. BDCs, the public siblings of the Private Credit funds, have rebounded from the lows, but remain down for the year in the context of an equity market that is fighting to regain new all time highs. The Fed will likely cut rates next week and it looks like it will be received like rain in the desert in the credit world. Will that be enough to contain credit worries?

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