Credit spreads: at a critical macro juncture?

Credit spreads have trended lower over the past decade to levels that do not reflect the underlying deterioration of the credit quality of corporates.

The key takeaways are as follows:

  • The share of lower rated companies in the US investment grade corporate bond market has grown dramatically over the last decade, to more than 50% of the total.
  • US investment grade spreads have more than halved in the past 10 years despite the decline in quality, leaving investors under-compensated for the risk exposure.
  • Less return compensation for more credit risk reflects the low-yield environment and central bank actions such as quantitative easing.
  • Looking ahead, less central bank support and/or higher yields due to persistent inflation could cause a re-evaluation of the fundamental credit quality that investors hold.

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Economic insights Credit spreads: at a critical macro juncture?

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