- The credit cycle has advanced to the later stages of the expansion phase – characterized by higher expected volatility and a greater risk of a downturn scenario.
- Risk premiums currently appear attractive, relative to history, but catalysts for spread tightening appear limited given concerns over persistent inflation and the current geopolitical landscape.
- A steady rise in defaults is expected, but it should still be below historical averages. Tighter monetary policy and swiftly moving higher rates could begin to pressure corporate health leading to a rise in losses and lower risk premium.
- During periods of higher inflation, lower-rated high yield companies have historically fared worse on a total return basis compared to higher quality HY companies. Companies that can weather inflationary environments by passing through rising input costs while maintaining demand for their goods and services could stand to perform well.