CREDIT
RISK MONITOR
Immaculate moderation
Credit to central bankers for engineering a soft landing. Inflation has moderated globally, economic growth in the US has subsided from the fast pace of 2023 and this is opening the path to modest interest rate cuts. This is a decent backdrop for credit as reflected in strong investor appetite and a market that continues to price spreads toward the narrower end of their historical range. We moved our debt load traffic light from red to amber. The light reflects both the stock of debt as well as net debt relative to EBITDA. As earnings and cash holdings have grown into the debt load, it no longer falls in the red category. All three risk traffic lights are at neutral amber and we remain constructive on credit markets overall.
Jim Cielinski, CFA
Global Head of Fixed Income
Key Takeaways
- The turn in the rate cycle should be supportive. Central banks in Sweden, Canada and the Eurozone having already embarked on rate cuts and expectations are growing that the US Federal Reserve will join them. Falling policy rates could pave the way to lower bond yields, although coupon resets may still be higher given how low rates were a few years ago.
- Robust earnings provide support. Earnings have grown, helping companies service their debt, although some of the explosive growth has come from companies that issue little debt. We look for a broadening of earnings growth but are mindful that lower inflation is likely to mean lower nominal growth for the economy.
- Issuance has remained well received. Appetite for bonds remains strong with gross supply higher in the first half of 2024 compared with the same period in 2023 for both investment grade and high yield bonds. Falling rates, in our view, should make fixed yields on bonds attractive.
- The countdown to the US election is underway. Fiscal easing is potentially good for corporations, but markets may be volatile if they sense a clean sweep and potentially unchecked spending, or any escalation in trade tariffs.
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