Corporate credit outlook

Q1 2023 Corporate credit outlook: Navigating the crosscurrents

As we enter 2023, credit faces crosscurrents. Fundamentals remain strong but economic growth is likely slowing. We assess what this means for markets in our Q1 outlook.

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January 26, 2023 | 15 minute read

2022 was a year that many will want to forget. Punishing inflation combined with an aggressive Fed hiking cycle wreaked havoc on traditional markets. There were few places to hide as stocks and core fixed income both ended with double-digit declines for the first time in 150 years. Corporate credit markets were not spared either; an initial sell-off in duration-sensitive, higher quality credits eventually gave way to recession concerns and underperformance by lower-quality and lower-rated assets.

As we enter 2023, credit markets are faced with crosscurrents. Despite sharp index level declines last year, corporate fundamentals continued to improve and defaults remained benign. The economy, however, is likely to slow and the odds of a recession have risen. But what 2023 has that 2022 didn’t, is a starting point of much higher yields, which could serve as a cushion should spreads widen this year. Markets may remain volatile, especially if a looming recession materializes, but credit markets are, in our view, well-positioned to navigate another uncertain environment in 2023.


Q1 2023 Corporate credit outlook: Navigating the crosscurrents

Key takeaways

  • 2022 was a challenging year for markets, as inflation, rising interest rates, a hawkish Fed, geopolitical tensions and recession fears weighed on many traditional asset classes. High yield (HY) bonds ended the year down -11.22% while loans, which were buoyed by their floating rate coupons, lost -0.60%.
  • Despite these headline declines, a benign default environment and strong corporate fundamentals kept spreads relatively maintained. Yields in each market have, however, risen substantially, with HY bonds and loans each offering loans in excess of 9%. Historically, forward returns from similar starting yield levels have been attractive.
  • Many of last year’s uncertainties remain, which we believe may continue to stoke volatility. Plus, the probability of a recession at some point in 2023 has risen substantially. Still, we believe the strong fundamentals that currently support credit markets make them relatively well-positioned to navigate this environment. We stress a need to remain active and prefer an up-in-quality approach to credit, which includes a preference for bonds over loans and higher-rated assets within each market.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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Kara O’Halloran, CFA

Director, Investment Research

Robert Hoffman, CFA

Managing Director, Credit Wealth Solutions

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