The current credit cycle continues to show strength despite being longer than prior ones. Both investment grade and high yield spreads are very tight at 80 bps for IG and 289 bps for HY (see below). The appetite for cash flow, and the strength of US corporate balance sheets after 10 years of zero interest rates where they issued long term debt at very low cost, have contributed to the age and strength of this cycle. The maturity wall for HY will grow from $500 Bn in 2024 to $800Bn in 2026, which seems manageable, and for IG it’s around $1.8Tn per year over the next 2 years which is not too worrisome either, absent other problems. The basis, however, which is the treasury yield is trending up. If we accept the words of the Fed at face value, and there will be no recession, and perhaps an uptick in inflation, treasury yields may go up as net new treasury debt is issued and the existing one is renewed at higher yields. Since credit spreads are not big enough to cushion duration shocks, at this point the real risk comes from interest rates. 2022 was a horrible year for interest rate risk as the Fed was raising interest rates, with the long end of the curve losing 20+%. How will you position your fixed income portfolio for this scenario?
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