May 13, 2022

Worries About The Next Shoe To Drop

The next phase of the bear market for spread product has begun, as investors shift focus from interest rate/convexity risk to credit risk. Surging CDS spreads on corporate bonds highlight that investors are beginning to focus on the next shoes to drop: falling profits and rising defaults. Funding liquidity will dry up long before the Fed’s balance sheet shrinks back to “normal”. Municipal bonds are not a safe haven, but investors that must hold some lower quality paper should favor this sector over Corporates or non-Agency CMBS.