Goldilocks and the three bulls?

Global disinflation, resilient US growth and the expectations of lower rates have coincided with a diminished risk of a shock to corporate earnings and a slightly better outlook for access to capital. This translates, on balance, to a less negative view on a credit recession in terms of probability or timing. Current positives for credit include attractive all-in yields, increasing diversification benefits vis-à-vis equities as inflation falls and the prospect of cash in money market funds shifting into bonds. That said, the jury is still out on whether credit fundamentals have truly turned a corner. We are cautiously optimistic. We are positive on credit overall but are maintaining a focus on quality companies with resilient cash flows.

Jim Cielinski Capabilities Quote Headshot
Jim Cielinski, CFA

Global Head of Fixed Income

Key Takeaways

  • ‘Soft landing’ narrative dominates, but perfect soft landings are rare
    Disinflation globally, better-than-expected US economic data and consensus expectations of interest rate cuts in 2024 saw credit rallying in Q4 2023, with spreads ending 2023 close to 10-year average levels.
  • Debt loads – one of our three long-term credit cycle indicators still flashing red
    Government debt could remain elevated in 2024 given a busy election year, while leverage has risen marginally among corporates.
  • Access to capital and earnings/cash flows – better on the margin
    Access to capital – another of our traffic lights – has shifted from red to amber, reflecting a slight easing in lending standards and rates coming down. However, lending standards remain tight in absolute terms with ongoing weakness in credit growth, although private credit is offering an alternative source of funding.
  • Cautiously optimistic – and leaning more towards investment grade
    Real rates are still elevated and the lagged effects of previous tightening are still feeding through, but positives for credit include attractive all in yields and the possibility of spreads tightening if the soft landing narrative holds.

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