Corporate credit outlook

Q2 2023 Corporate credit outlook: Déjà vu?

Macro sentiment around the path of interest rates, preference for risk-taking and the general economic outlook has had a remarkably similar impact on corporate credit in 2023 as it did in 1H 2022.

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April 4, 2023 | 15 minute read

The more things change, the more they stay the same.

This French proverb aptly describes credit markets and the performance they’ve witnessed to start 2023. That’s not to say markets overall have been driven by or performed the same as they did a year ago. However, macro sentiment around the path of interest rates, preference for risk-taking and the general economic outlook has had a remarkably similar impact on corporate credit as it did in the first half of 2022. In our view, the relatively stable underlying fundamentals in credit markets—which have continued through Q1 and are unlikely to change in Q2—are making them heavily dependent on factors originating outside of credit markets themselves.


Q2 2023 Corporate credit outlook: Déjà vu?

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 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 high yield 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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Robert Hoffman, CFA

Managing Director, Credit Wealth Solutions

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