Contagion

The lower end of the credit spectrum is starting to look uncomfortable with the recession whispers. In the chart below, you can see the CCC spreads vs the BB ones. You can see that BB are still relatively calmed, but CCC have already experienced some action. We’re still well below the levels we saw during the summer last year, and credit funds may use as these levels as an entry point to secure some yield pickup, but the winds are pushing money to the East, where risk premium seekers are buying European equities at a pace unseen over the last decade, and perhaps the liquidity in the U.S. is starting to dry up. The Fed will tell us on Wednesday how they view the economy, but the message will likely be broad and inconclusive, unless, they start to see contagion from CCC, into BB. Then they’ll know something is going on. It’s difficult to see if they will be able to do something about it, because the data dependent narrative is not on their side (inflation above 2% and unemployment contained so far), but the fear of stagflation is starting to appear. Another signal to follow.

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