U.S. Credit: We’re Not in Uncharted Territory

Key Takeaways

  • Rates in the U.S. credit market are expected to stay higher for longer, regardless of the actions of the Federal Reserve.
  • U.S. corporate bonds have been considered expensive due to narrowing spreads, with investment-grade spreads declining by over 40 basis points and high-yield differentials falling by roughly 140 basis points.
  • The current spread levels in the U.S. credit market are not unusual, as there have been previous periods when corporates have traded at similar or even lower levels.

While the money and bond markets continue their Fed-watch saga, there is one constant that we have been emphasizing for the fixed income landscape: a new rate regime. An integral aspect of this investment setting is that, despite what the Federal Reserve may or may not do, rates appear to be on course for staying higher for longer.

Against this backdrop, investors have been trying to determine where should they allocate funds in the fixed income universe, specifically within the U.S. Typically, one can break down the bond market into two distinct sectors: interest sensitive and credit sensitive. I’ve been spending a good amount of time in recent blogs posts and podcasts on the interest-sensitive side of the equation, so I thought it would be prudent to address trends for U.S. credit.