May 05, 2022

Spreads Are Underpricing Recession Risk

Corporate bond spreads are under pressure again as the Fed ratchets up the pace of tightening. Nonetheless, IG and HY corporate spreads are still narrow by historical standards. A key reason is the favorable starting point for corporate financial health and record high profitability, in part driven by strong pricing power. All that is about to change as Q1 likely marked the peak in profit margins for the cycle. Many tailwinds that drove this extraordinary cycle have turned into headwinds, and the zenith for the level of profits is approaching. Read today’s report to find out what this means for fixed income investors.