Markets are not taking the ongoing rise in default rates for HY and loans seriously, see charts below, and many investors argue that “this is just a normalization,” or “these are companies nobody has heard about.”
The reality is that more and more companies are defaulting because the cost of capital is higher, and Fed Chair Powell says that interest rates will stay at these levels “for a couple of years,” so tight monetary policy will continue to have a greater negative effect on the economy and capital markets.
In fact, higher costs of capital is precisely how monetary policy works: By making it more difficult to get financing.
In other words, Fed hikes are biting harder and harder, and all investors should have a view on how high they think default rates will go during this cycle, see again charts below.
What could be the aha moment in markets? Once there is a default by some household name in credit, we will likely see an overnight change in market sentiment from bullish to bearish.
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