Credit Market Cracks! HY Credit Signals The "Worst" Of The 2022 Recession Has Yet To Begin

The High Yield index has often been used as a crucial fear indicator when viewing recession concerns via the lens of corporate credit. US HY spreads of 800-850bp are often indicative of heightened recession worries or a growth concern. The fact that the current cash spreads of 450bp are well within what may be considered strained levels, indicating that recession risks are still not sufficiently priced in. However, taking into consideration the HY index's positive composition change, we think that the fair spread level in this particular mild recession is about 700bp.

There will be a wave of downgrades throughout the next quarters. Only at the worst of the GFC and the health crisis has the loan index historically crossed 750 bp in spread and an 85 cash price. This time, we anticipate that these levels will be challenged, even in a moderate recession, suggesting a substantial decline from present levels (480bp in spread; 95 cash price). The loan market is fundamentally more susceptible, even if HY credit spreads may be less sensitive than in the past to a downturn in GDP. Right now, both canaries are singing. However, in light of current values, we continue to take a cautious approach to corporate credit, remaining higher in quality and seniority.

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