Highlights

  • The credit cycle has moved deeper into ‘Late Cycle’ with each Fed hike increasing the likelihood of a ‘Downturn’ scenario. Though fundamentals are still in good shape, the Fed’s restrictive policy - firmly fixed on bringing inflation under control - could contribute to slowly eroding credit metrics.
  • Strong forward-looking potential return scenarios in US credit markets, even in the event of a downturn, could be ahead given the recent backup in spreads coupled with higher base rates.
  • High yield market dispersion has increased as yields have risen, leading to opportunities for individual security selection. In particular, yields for certain high yield issuers appear to be compensating investors fairly for increased risk of a downturn scenario. Carry from higher yields could potentially offset further price declines over time.
  • While risk premiums appear favorable relative to history, particularly in high yield credit, inflation-related tightening financial conditions could lead to higher losses and slow near-term spread tightening.

Quarterly Credit Update

Loomis Sayles Full Discretion Team Views – 2nd Quarter 2022

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Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise bond prices usually fall), inflation and liquidity.

This material is provided for informational purposes only and should not be construed as investment advice. The analysis and opinion expressed represent the subjective views of the Loomis Sayles Full Discretion Team as of July 2022 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted. Actual results may vary.

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