Following the recent publication of our Mid-Year Economic Outlook, our credit team published our inaugural Mid-Year Credit Outlook paper yesterday. It’s available here.
The key themes we explore in this paper are:
- The buoyant demand for corporate debt that bolstered primary markets this year came alongside pockets of distress in the riskier parts of the market. We expect this divergence to persist through 2024 as demand for high-quality credit keeps index spreads near record tights while a subset of lower-quality corporates struggle with generationally high interest rates.
- We expect investment grade bonds and BB spreads to remain stable despite tight valuations, given elevated funding costs do not pose a meaningful risk for the credit metrics of these issuers. Meanwhile, the outlook for lower-quality credit is more uncertain and credit spreads across the B/CCC universe could be pressured if the economic backdrop deteriorates or in a higher-for-longer rate environment.
- The continued evolution of AI and its increased grid and power demand, the disruption of media providers from new technologies and competitors as well as the US elections are all key themes we expect will take center stage throughout the rest of the year.
- Looking at the investment grade market, there appears to be a rising fragmentation when it comes to liquidity. The most liquid segments of the market have seen an improvement in trading volumes, while the liquidity profile of older vintage and smaller bonds has deteriorated. At the same time, given liquidity premia have compressed, we believe private credit is an attractive replacement for this allocation.
- The significant growth in middle market lending over the past year has driven an increase in issuance of two types of debt instruments that share some resemblance: middle-market CLOs and BDC unsecured debt. While issued in distinct markets, they have similar underlying risk exposures making their valuations readily comparable. We present a novel analysis comparing the two types of structures.
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