Halfway through the year, markets have broadly displayed almost unwavering strength. Absent the brief period of volatility induced by a bout of bank failures in March, markets have moved higher while volatility—as measured by the VIX Index—has fallen to levels not seen since just prior to the pandemic. Credit markets rose alongside equities with riskier, CCC-rated credits, leading the way. Despite stubborn concerns about the potential for a recession later this year or in 2024—concerns we share—investors have displayed little interest in adopting a risk-off approach so far.
Key takeaways
- Absent a brief period of bank-stress–related volatility, markets have displayed notable strength throughout 2023, as economic data have remained resilient and inflation has slowly cooled. Driven by higher yields, high yield (HY) bonds and senior secured loans have turned in strong YTD returns of 5.38% and 5.67%, respectively. Lower-rated credits have strongly outperformed higher-rated securities YTD.
- Credit fundamentals slowed somewhat in Q1 but remain healthy. High yield bond and loan issuers continue to generate solid revenue and EBITDA figures while leverage levels have fallen, a sign of conservative balance sheet management across both markets. Though default levels have risen recently, they remain below their long-term averages across both markets, reflecting strong corporate fundamentals and balance sheet management since the pandemic began.
- Despite the positive backdrop, there are some signs of weakness and reasons for caution. We still forecast a recession in our medium- to longer-term outlook as nearly all Fed rate hike cycles end in recession. The yield curve remains severely inverted and jobless claims have risen more than 20% off their base. For this reason, we believe active management combined with sound fundamental underwriting are important in driving investor returns.
Read the complete Q3 2023 Corporate credit outlook to learn more.
