May 19, 2022
High-yield corporate bonds are cratering as investors begin to grapple with how much corporate profits could suffer over the next year. Some are calling this a buying opportunity. We disagree. Value has improved, but it is too early to nibble given that the earnings contraction has not even begun. The market is discounting a rise in the default rate to about 5%, but there is still plenty of upside. Even a mild profit recession could generate a HY spread blowout of 500bps. Almost 800bps is likely in a garden variety recession.